Reacting to the subprime mortgage crisis, Congress passed the Mortgage Forgiveness Debt Relief Act late in 2007.
Alert: The new law’s centerpiece is a tax exclusion for beleaguered debtors. But it also contains additional tax breaks for homeowners, particularly surviving spouses.
Here’s a quick summary of three key changes:
1. To forgive is divine. Normally, income realized by someone due to a discharge of debt constitutes taxable income, unless an exception applies. Generally, the taxable amount is the difference between the debt’s principal balance and the amount used to satisfy the debt.
Under the new law, the first $2 million of mortgage debt forgiveness on your principal residence is tax-free ($1 million for married taxpayers filing separately). You must reduce the amount of your basis in the home by the excluded amount, but not below zero.
This new tax exclusion does not apply if the discharge isn’t ...(register to read more)