Tax relief for foreclosures and short sales set to expire
The Mortgage Debt Relief Act of 2007 is set to retire at the end of the year. Bottom line: If Congress fails to extend the act, any home that faces foreclosure or sold via short sale, the lender would then be send the IRS a 1099 form stating the debt that was forgiven can be counted as taxable income. For example: You sell your home $400,000 , which is less than the loan amount owed of $350,000. The $50,000 forgiven is then counted as income.
From the IRS web site: The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
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