The Senate Finance Committee recently approved extending the Mortgage Forgiveness Debt Relief Act through 2013. That is great news for anyone pursuing a short sale and not able to close before the end of this year. The IRS considers any forgiven debt to be income. So, the amount that the bank is “shorted” is considered income to the IRS.
However, under the Act, this debt is forgiven and the borrower is not taxed on it as long as it is their primary residence. With the exemption, up to $2 million of forgiven debt is eligible ($1 million if married filing separately). Many borrowers have counting on this bill to be extended. Without it, many will face a tax bill of tens of thousands of dollars.
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This post was written by Gina Berg