Forgiven Mortgage Debt May Soon Be Subject To Taxes

Homeowners who reduce their mortgage debt may be taxed for that relief beginning the first of the year.  Since 2007 a special exemption has been in place to exempt as much as $2 million per household in principal reduction and other aid from banks.  This exemption is set to expire at the end of 2012.

This special exemption is set to expire along with many similar tax provisions, including President Bush's tax cuts, and the automatic government spending reductions.  The special exemption could disappear just as many homeowners are receiving large amounts of mortgage relief from the U.S.'s five largest banks as part of the national settlement of foreclosure abuse investigations.

Lawmakers are expected to push for an extension of the special tax exemption as Congress returns from summer break this week.  However, even though it has support from both parties, it is unlikely to be voted on before the Presidential election.  It will also be difficult to get it passed after the election because lawmakers will have many other issues to deal with, including the government spending restrictions set to expire at the end of the year.

Mortgage debt that is forgiven by a bank as part of a principal reduction, short sale or foreclosure, which is known as shadow income, must be reported as income by the homeowner and is subject to taxation.  The mortgage lender reports the forgiven amount on an Internal Revenue Service (IRS) form.

However, in 2007 Congress enacted the Mortgage Forgiveness Debt Relief Act to help struggling homeowners.  If the debt is forgiven because of a drop in a home's value or a decline in the owner's financial condition, up to $2 million of the relief for couples filing joint tax returns is exempted from federal taxes.

The exemption provides relief on tens or hundreds of thousands of dollars.  It was originally set to expire at the end of 2010.  However, with the housing market and overall economy crash in 2008, Congress extended the relief through the end of 2012.  The housing market is finally showing signs of recovery but this relief is still needed.

If you are struggling with your mortgage payments you may want to consider filing bankruptcy.  I can help you file bankruptcy in Kansas or Missouri.  Please contact me for a free initial consultation.  Any questions or comments are welcome below.