Thanks to a reader and tipster (send in your tips here) I was alerted to the following story about the soon to be ending tax forgiveness regulation for homeowners getting mortgage debt forgiveness.
“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.
Whoops.
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.
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The excerpt from the original article might give readers the wrong impression that the Mortgage Forgiveness Debt Relief Act applies *only* to homeowners who are eligible to participate in the National Mortgage Settlement. Just to clarify, the MFDRA applies in general to “qualified principal residence indebtedness,” regardless of whether or not the homeowner is participating in the national settlement. Also, the standard exemption for insolvency will still apply, so many consumers will still be able to legitimately avoid taxes on forgiven mortgage debt even if the MFDRA is not extended beyond 12/31/2012. As of August 12th, the L.A. times had published an article stating: “The Senate Finance Committee has approved a bipartisan bill that would extend the Mortgage Forgiveness Debt Relief Act through 2013.” Whether it will get to the floor of the Senate is another story.