When a home is foreclosed on, sold via short-sale, or a home owner receives a modification loan, the amount of money forgiven is taxable because it can be considered income (albeit unrealized). That credit on your tax report can hurt to the tune of about $1500 to $3500 per $10,000. Therefore if you lose your home to foreclosure and it as worth $150,000, you could conceivably owe $22,500 to $52,500 in taxes.
However through the Mortgage Debt Relief Act of 2007, this tax debt was forgiven for millions of people. Unfortunately this is due to expire at the end of 2012 so could be big trouble for people already in financial trouble. According to DS News.com, it may be extended.
“Obama did include it in his budget, to extend it to 2014,” said Mark Luscombe, a principal analyst for tax research firm CCH, in a statement. “Congress….. might decide it’s not as crucial as extending the tax breaks that already expired at the end of last year.”
That doesn’t mean Congress won’t eventually act to extend the relief, Luscombe said.
If Congress acts, the tax relief could be extended to January 1, 2015.
