The Mortgage Forgiveness Debt Relief Act of 2007 relieves homeowners from being taxed on the deficiency when they obtain a Loan Modification, Short Sale and even in a Foreclosure. This Tax Act is only good through 2012, which means if you have forgiven mortgage debt after 2012, expect a tax bill. Homeowners who are foreclosed, sell short or modify their loans will be taxed as income for the deficient balance.
Tara-Nicholle Nelson, Broker in San Francisco, CA says, “While the long-term housing outlook is beginning to look up, 2011 is projected to be the peak year for foreclosures during this market cycle. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.”
“Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan mod, short sale or foreclosure on most primary residences through 2012. But right now, banks are taking many months, or even years, to work out mortgages in all of these ways; the average foreclosure in New York state right now occurs only after 22 months of missed mortgage payments. If you foresee any of these outcomes in your future, don’t put things off. Do what you can to get to closure on your distressed home and loan, ASAP, while you won’t have income taxes to add as the insult on top of your significant housing injury.”
