Many of our clients may receive the benefit of having the lender forgive a portion of their mortgage debt. For example, if a borrower sells the property through a short sale, the lender will file a 1099-C debt cancellation form with the IRS to declare a loss for the difference between the value of the property and the amount the lender is owed on the mortgage.
Until the Mortgage Debt Relief Act was passed at the start of the foreclosure crisis in 2007, the IRS considered such cancelled debt taxable income, with some limited exceptions. http://taxes.about.com/od/income/qt/canceled_debt.htm This law protects primary homeowners from being taxed on forgiven debt under most circumstances and has been a great relief to millions of borrowers suffering through our historic housing collapse and global economic catastrophe.
Now, the law has expired at the end of 2013 and Congress has not renewed it. This means that many homeowners who may receive the benefit of debt forgiveness through a short sale or other method after this year will likely suffer a large tax bill.
Widerman Malek Celebration Law Office will continue to write about this important topic and offer the expert tax advice of a CPA on our blog and an in-house presentation. Stay tuned for more information.
