Under curent U.S. tax law law, a homeowner with an underwater mortgage who goes through a short sale (or foreclosure) has part of his debt forgiven by a bank will in most cases not owe any added income tax. ( See your accountant or CPA)
This forgiven debt had been treated as a ‘gift’ from the bank.
As a gift, that money is income and taxable by the IRS when the homeowner fills out his yearly income taxes. However, the 2007 Act (effective through Dec. 31, 2012) allows most former owners to walk away without owing any added income tax. Obviously, this is a major benefit to underwater owners or anyone who has gone through the process of losing their home.
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HREU is happy to report that a bipartisan bill introduced late last week by U.S. Senators Debbie Stabenow (D-MI) and Dean Heller (R-NV) – the Mortgage Relief Act – would extend that rule past Dec. 31 if approved by both the House and Senate and signed by President Obama. Senators Robert Menendez (D-NJ), Sherrod Brown (D-OH) and Jeff Merkley (D-OR) cosponsored the legislation.
Stabenow championed the original Mortgage Relief Act of 2007 designed to fix the problem that now expires at the end of 2012. Stabenow and Heller’s new bill will extend this tax protection for underwater homeowners through 2015.
Approximately, 20 to 25 percent of American homeowners are currently underwater on their mortgages.