Will the Mortgage Forgiveness Debt Relief Act be renewed? I wish I knew the answer to that question. Right now, there is a lot of uncertainty about the renewal of the Mortgage Forgiveness Debt Relief Act. According to the IRS website, the Mortgage Forgiveness Debt Relief Act “applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.”
Any time that you owe a debt to someone (or an entity – such as a corporation), and that debt is forgiven or canceled, the IRS says that the amount of debt that is forgiven or canceled is income. You also usually “get” to pay taxes on that income.
The Mortgage Forgiveness Debt Relief Act provides some homeowners with tax relief. If your home is encumbered by an underwater mortgage and you lost your home to a short sale, deed in lieu of foreclosure, or foreclosure, then the Mortgage Forgiveness Debt Relief Act might apply to you. If it applies to you, then you can exclude certain cancelled debt on your principal residence from your income (and that means you wouldn’t have to pay taxes on that “income”).
Unfortunately, the Mortgage Forgiveness Debt Relief Act expires at the end of this year (2012), and no one knows yet whether it will be renewed. My hope is that it will be renewed, because without its renewal, there could be a lot more former homeowners in serious financial trouble (owing a significant tax debt after losing their home).
If the Mortgage Forgiveness Debt Relief Act is not renewed – or if it doesn’t apply to you – there are still other ways (proving insolvency and bankruptcy) to possibly prevent owing as much in taxes. My advice is that if you are having difficulty paying your mortgage and you think that you may be losing your house to foreclosure, deed in lieu of foreclosure, or a short sale, consult with an experienced CPA or accountant as soon as possible. That way you can do everything possible to reduce the amount that you could owe.