Originally posted on April 3, 2014.
The Internal Revenue Service considers forgiven debt as ordinary income. This would include the deficiency resulting from a foreclosure, short sale, or loan modification. However, in 2007 the Mortgage Debt Relief Act was enacted and qualified homeowners whose mortgages were reduced or written off as a result of loan modifications, foreclosures or a short sales were exempt from taxation. This only applied to primary residences. In 2011 this saved an estimated 100,000 taxpayers from huge tax bills. However, this Act expired on December 31st of 2013, and Congress has not yet extended it.
There has not been a formal announcement, but the Senate Finance Committee expects to take up an “extenders” package within weeks. The Mortgage Debt Relief Act is just one of over 50 corporate and individual tax benefits that expired last December. It isn’t known whether or not the Mortgage Debt Relief Act will be part of the bill the Finance Committee proposes, but it does have strong bipartisan support, and most tax analysts think the final bill will include some type of extension.