Mortgage Debt Relief Remains in 2013 Cliff Bill

The final tax agreement approved late last night between the House and the Senate is not online, but as of early Tuesday morning the American Taxpayer Relief Act of 2012 (H.R. 8) included tax forgiveness for unpaid mortgage debt. Without the continuation the debt forgiveness policy would have ended December 31st.

Until the Mortgage Forgiveness Debt Relief Act of 2007, you could be taxed on unpaid mortgage debt. If you owed $200,000 but had a short sale or foreclosure and only paid of $150,000 of the debt, then the unpaid $50,000 could be treated by Uncle Sam as “imputed” income and taxed.

The 2007 Act said that unpaid mortgage debt would no longer be taxed as income — but also that the Act would expire at Midnight on December 31, 2012.

Short Sales & Foreclosures

Under the Act short sales and foreclosures became more tolerable for borrowers; had the forgiveness legislation ended then owners would have had a real incentive to avoid short sales and foreclosures — meaning that distressed property could be on the market far longer, properties that tend to drive down both local home values and tax collections.

At this writing the final agreement is not online. Could a few surprises slip in? Sure. Just consider that $60 billion in aid for states hit by Hurricane Sandy was magically excluded in the Saturday Night version of the legislation. Will it go back in? Who knows?

Once the final legislation is available it will be necessary to see if the forgiveness extension remains in place and if so how long the debt relief provision (now Sec. 202)  will continue.

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