Forgiven mortgage debt excluded from taxable income
Steve Dibert, MFI-Miami
Members of Congress actually did something to help distressed homeowners for a change. As part of the American Taxpayer Relief Act of 2012 aka the “Fiscal Cliff” bill, distressed homeowners will not be required to include forgiven debt as part of their taxable income for 2012 or 2013.
This means distressed homeowners have until January 1, 2014 to short sell their properties without declaring the deficiency as income as they were required to do prior to the financial crisis.
However, not everyone will benefit from the extension. It only covers forgiven debt on principal residences and amounts up to $2 million, or $1 million if married but filing separately. The act does not apply to second mortgages where the money was used for non-household expenses or on second properties and investment properties.
The pending expiration had Realtors scurrying about like rats on a sinking ship trying to close deals before January 1st. The sunset also caused concern with state attorneys general because it would dilute the $25 billion national mortgage settlement because without the extension, principal reductions offered in the settlement would be considered taxable income.