Tax relief on mortgage debt forgiveness ends in 2013
By Lew Sichelman
January 29, 2012
Reporting From Washington— The window is closing rapidly on one of the most important tax-relief provisions enacted by Congress during the housing crisis to help financially strapped homeowners.
Although the 2007 law that allows taxpayers to exclude from income the amount of debt that is forgiven or canceled by their lenders doesn't expire until Dec. 31, it's likely to take every bit of the next 11 months for financially troubled homeowners to persuade their banks to either foreclose or allow their houses to be sold for less than they are worth.
Although owners who are struggling to hold on to their homes shouldn't throw in the towel solely because of the pending tax bite, it is certainly something to consider.
Under the tax code, borrowed money need not be reported as income because you have an obligation to repay. But if the lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists.
So, if you owe $250,000 and your lender forgives $50,000 of that debt in a $200,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36%, you would owe $18,000 in taxes.
more
http://www.latimes.com/business/realestate/la-fi-lew-20120129,0,7465348.story