Homeowners May be Taxed on Forgiven Mortgage Principle Next Year

As if dealing with a short sale or foreclosure is not enough for homeowners hit hard by the recession, an additional burden may be added to debt their loads at the end of this year.

Since 2007, the Mortgage Debt Relief Act has brought tax relief to hundreds of thousands of homeowners. Property owners who are forgiven a portion of their mortgage principle through a foreclosure, short sale or mortgage restructuring do not have to pay taxes on the forgiven debt. For example, if someone sells their $150,000 home on a short sale for $120,000, the bank forgives the difference and no taxes are due on the $30,000 of "income" received by the owner.

However, the Act does not extend beyond 2012. When the legislation was enacted at the beginning of the downturn in the housing market, no one had any idea the recession would last as long as it has. This means that, starting next year, any amount of forgiven mortgage principal will be taxable as income. For most, this additional tax simply adds more to their financial burdens.

Realtors and tax attorneys are working together to persuade Congress to extend the benefits of the Mortgage Debt Relief Act beyond 2012. Legislators from both sides of the political fence have presented bills to extend the relief for one to two years and have gone to committee for review.

Source: CBS Money Watch, "New taxes on forgiven mortgage debt to hit owners," Ilyce Glink, June 28, 2012.