As reported back in December, the Mortgage Forgiveness Debt Relief Act of 2007 was set to expire on the eve of December 31, 2012. As a result of this Act, any deficiency owed by a homeowner to their lender beyond the short sale value (and not agreed by the lender to be waived) would not be taxed as income to the homeowner.
In a last minute deal struck by Congress, a key provision protecting borrowers losing their homes was extended for one more year. The Mortgage Forgiveness Debt Relief Act of 2007, which technically expired on December 31, 2012 was extended to December 31, 2013.
In the case of a foreclosure, there can be circumstances under which a mortgage debt is forgiven (the debt not fully paid by the recovery of the home in foreclosure), and a homeowner then “charged” with additional, taxable income. As a result of the flood of foreclosures in 2007, a law was passed which provided that under certain limited circumstances, that forgiveness certain related debt would not be considered taxable as income to the homeowner.
**As with any tax issue, this article is not intended to substitute for specific, professional tax advice. This article is general in nature and may not be relied upon by the reader for specific legal advice. You should consult with your own tax professional as to your own specific circumstances.