Mortgage Debt Forgiveness Relief Act Extended Until January 1, 2014
U.S. homeowners scored a victory as Congress extended the Mortgage Debt Forgiveness Relief Act until January 1, 2014. The Act generally allows people to exclude “phantom income” incurred by the discharge of debt on a principle residence.
Homeowners generally incur this debt through short sales, foreclosure as well as loan modifications. This provision applies to debt forgiven up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
Here is the official link to the congressional bill:
Debt Forgiveness Act Not Extended In California — Yet
This extension only applies to the federal taxes. Here in California, the state has yet to extend the Mortgage Forgiveness Act yet. Previously, California mirrored the federal government in extending the act and hopefully the state will do the same thing shortly.
Much of the concern for homeowners circled around homeowners in the middle of a short sale or homeowners who were considering short selling their home. If Congress had not extended the act then homeowners would potentially be responsible for paying the IRS taxes based on the difference in the amount forgiven in the short sale.
Most homeowners considering or in the middle of a short sale would not be in a position to pay additional taxes based on their “phantom income.”. Even though Congress made mistakes in creating their budget, they got it right by extending this act and giving homeowners an opportunity to have a chance to straighten out their distressed home situation.