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Mortgage debt forgiveness: income tax exemption not extended

It's bad enough to lose your house to foreclosure or have to give it up in a short sale.

But it's even worse when you are facing possible tax liability for the supposed "income" that you had from the forgiveness of your mortgage debt.

That is why, from 2007 through last year, Congress created a tax break for these taxpayers. In this post, we will discuss the status of that break in the New Year.

The status of this former tax break for homeowners is not good. The tax break that has been in place for six years, since the height of the 2007 real estate crisis, has now expired.

The 2007 law had allowed a tax exemption of up to $2 million for each household for mortgage debt forgiveness on federal income taxes. Congress failed to renew the exemption, however, for the New Year.

To be sure, the real estate market has improved somewhat since Congress first passed the exemption for forgiven mortgage debt six years ago. But many homeowners (and former homeowners) are still struggling.

It isn't just that taxing forgiven mortgage debt adds insult to injury for someone who has already lost a home to foreclosure. There is also the fact that paying taxes on the nominal income from forgiven debt can be very difficult for someone whose financial challenges led to the foreclosure in the first place.

This isn't only about past foreclosures, either. Nationally, there are still about 6.4 million people who, though still in their homes, are underwater on their mortgages.

Many of those people could benefit from a mortgage modification. Such a modification could bring down the amount of principal that must be repaid to the bank.

It remains to be seen, however, whether Congress will act in 2014 to restore the tax exemption for income from mortgage debt forgiveness.

Source: Los Angeles Times, "Mortgage tax break expires despite bipartisan support in Congress," Jim Puzzanghera, Dec. 31, 2013

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