Many times a homeowner might feel relieved being out from under the obligation of a mortgage they can’t afford even though the property was lost due to foreclosure or short sale. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.
Congress enacted the Mortgage Relief Act specifically
to help homeowners who might be affected in the housing crisis that
started approximately in 2007. The Act expired on 12/31/12 but was
temporarily extended by Congress until December 31, 2013.
This relief only applies to a taxpayers’ principal residence which
does not include second homes and investment property. The maximum
amount is limited to $2 million of mortgage debt forgiveness or $1
million if filing separately.
Another provision is that the debt relief is limited to acquisition
indebtedness used to buy, build or improve the property. It excludes
cash equity loans whether made separately or in a refinance of the
Due to the serious consequences involved in short sales and
foreclosures, it is advised that homeowners faced with this possibility
should seek expert advice from their legal and tax professionals.