During the economic and housing crisis, Congress passed legislation that allowed homeowners who lost their home to foreclosure or a short sale, to not have to claim their mortgage debt forgiveness as taxable income.
However, the law enacted in 2007 expired on December 31st, 2013, and as of this writing, has not been renewed by Congress. Unless a homeowner files bankruptcy they will now have to pay income taxes on the mortgage debt that was forgiven by the lender. “It is inherently unfair for the big banks to be allowed to write off these payments while struggling homeowners are hit with new tax bills they can’t afford,” said Martha Coakley, Massachusetts Attorney General.
For example, if a homeowner has a $150,000 mortgage balance and the lender agrees to a $100,000 short sale, a homeowner in a 25% tax bracket would owe an additional $12,500 in Federal income taxes for the amount of the forgiven mortgage debt.
If Congress does not take action to renew the exemption, the only way for struggling homeowners to seek relief will be to consult with a bankruptcy attorney to determine if they qualify for bankruptcy protection for mortgage debt forgiveness. Although Senator Debbie Stabenow (D-MI) is sponsoring a bill to renew the exemption, given the current climate in Washington these days, it seems unlikely that it will be renewed any time soon.