Since 2007, that law has given homeowners an exemption on federal taxes when they obtain debt forgiveness on their primary home. For example, a family with a short sale for $100,000 less than their mortgage would otherwise have to pay taxes on that difference as if it were income. It also applies when lenders forgive a portion of mortgage principal without the home changing hands as in the case of a loan modification.
Without this tax exemption, some homeowners might choose to lose the home to foreclosure instead of facing a large tax bill; although that could come with other penalties.
The Mortgage Debt Relief Act will last until Jan. 1, 2014. It only applies to first homes.
This extension will help struggling homeowners that are unable to make their payments on their mortgages and give them the ability to proceed with a Short Sale rather than letting the property go into foreclosure.
Senate version of the bill: H. R. 8
It appears that the Mortgage Debt Relief Act of 2007 will be extended for one year. Usually cancelled debt is considered income, but a provision of the Debt Relief Act allowed borrowers “to exclude certain cancelled debt on [a] principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.” (excerpt from IRS).
Here is the text from H.R.8:
SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.
This is helpful for foreclosures, mortgage modifications, and for short sales (so the seller can sell the house for less than is owed, and not have to pay taxes on the debt forgiveness). This provision had wide bipartisan support and was expected to be included.
Read more at http://www.calculatedriskblog.com/2013/01/tax-bill-cancelled-mortgage-debt-relief.html#EhWrxVgSAM3kt21R.99
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