“In 2007, Congress enacted the Mortgage Forgiveness Debt Relief Act, which prevents homeowners from paying taxes when their mortgage debt is forgiven due to a decline in the owner’s financial life or a drop in the home’s value. (We first covered the debt cancellation tax, known as the 1099-C, early last year, and gave tips on what to do if the IRS taxes you on cancelled debt.)
The law applies to homeowners who participate in the National Mortgage Settlement who receive up to $2 million in reduced principal and interest charges. It is scheduled to expire at the end of 2012 along with all the other tax cuts we have heard about for years.
So, instead of getting the relief they need to save their houses, victimized homeowners will be forced to pay a significant portion of that savings to Uncle Sam. Since the average homeowner will receive about $19,000 in settlement relief, and the average middle class family pays about 25 percent in taxes, approximately one quarter of the forgiven debt — some $4,750 — will have to be paid to the IRS and by those who can least afford to pay it. For some families, that could be enough to tip the scales, pushing them back to the brink of foreclosure and eviction.”
You can read the full article by Adam Levin, here.Tax Will be Due on Forgiven Mortgage Debt Unless Congress Acts by Steve Rhode