Historically, debt cancelled or forgiven as part of a mortgage restructuring, default, or foreclosure proceeding is treated as taxable income. In 2007, Congress enacted legislation providing a temporary tax exclusion of up to $2 million for income derived from forgiven mortgage debt. After a subsequent extension, this tax exclusion is set to expire at the end of 2012. S. 2250 was introduced by Senator Debbie Stabenow (D-MI) to extend the tax exclusion for forgiven mortgage debt through the end of 2014.In recent years, Congress has passed a number of legislative packages known as “tax extenders” to extend expired or expiring tax provisions that are used by businesses and individuals alike. On August 2, 2012, the Senate Committee on Finance approved the Family and Business Tax Certainty Act of 2012, which included a number of these tax extenders, including a one year extension of the tax exclusion for forgiven mortgage debt through 2013.
It is not presently clear whether Senate Majority Leader Harry Reid (D-NV) will put either S. 2250 or the broader package of tax extenders on the Senate calendar during the upcoming lame duck session.
It’s time to be writing to our elected officials. If S. 2250 or something similar is not passed by the end of the year, any debt forgiven in a short sale will become taxable income for the seller.
Photo licensed from iStockPhoto | Source: Senator Kay Bailey Hutchison
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