Next year people negotiating for a principal reduction on their mortgage might find themselves taxed for that forgiven debt. Any discharged debt is considered income by the IRS, but to encourage recovery in the housing market, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. That Act exempted from taxation any forgiveness of mortgage debt due to a decrease in the value of the home. Unless extended, that relief will expire at the end of 2012. There is currently a bipartisan effort to extend this exemption that is still needed so direly by people finding themselves in homes worth less than they owe.
(ht: Los Angelos Times)
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