Having the taxes due on your forgiven debt…forgiven?

Most of us don’t look at the IRS as being very forgiving…but since 2007, this has been the case for qualifying debt forgiven by a lender in a short sale, foreclosure, deed-in-lieu or loan modification.

But this benevolence is scheduled to come to an end at the end of 2012 and this scheduled expiration of the mortgage debt relief act means a whole lot of uncertainty for a whole lot of underwater homeowners.

According to a preliminary report released by LPS, 2,060,000 properties are in foreclosure inventory. As of the end of the 2011 fourth quarter, 11.1 million borrowers were reported to be underwater, according to CoreLogic.

That’s a lot of potential debt to be forgiven, and through the Mortgage Debt Relief Act of 2007, homeowners get a break from paying taxes on their forgiven debt – the act is set to expire at the end of this year.

If congress can somehow get this act extended, this could lead to tens of thousands in savings for qualifying homeowners. For example, depending on one’s tax bracket, every $10,000 in forgiven debt could incur as much $3,500 in federal taxes. Thus, if $100,000 in mortgage debt is forgiven after a foreclosure, this could mean $35,000 in taxes owed for the borrower.

The criteria to have forgiven debt excluded as taxable income is the debt must be from a primary residence and the debt must be used to buy, build or substantially improve a primary residence. Also, the exclusion applies only to acquisition debt up to $2 million, or $1 million for married taxpayers filing separately.

My advice to those homeowners that are upside-down: make your decision to stay or go sooner rather than later…it could save you tens of thousands of dollars in tax liability.

Call me directly at 561.602.1258 to discuss what all of your options are. Or you can email me

Thanks for reading….Steve Jackson