The housing meltdown has exacted severe pain in the Twin Cities and across the country. Though the federal government has tried to respond with some relief, those steps have not always been enough for homeowners struggling to keep their homes out of foreclosure.
As Minnesota real estate attorneys, we see the effects of this every day.
One federal action that does potentially offer a measure of relief is the 2007 law allowing a tax break on cancelled or forgiven debt. If your lender agrees to a short sale or a refinancing, for example, you can exclude the amount of the cancelled debt when calculating your income for tax purposes.
Normally, under the tax code, borrowed funds are not considered income because they must be repaid. But if your lender later cancels all or part of your debt, the IRS generally requires you to report as income the amount you no longer owe.
Taxpayers have until December 31 of this year to take advantage of the 2007 law that created a time-limited exception to this general rule.
Of course, it's possible that the Mortgage Forgiveness Debt Relief Act of 2007 could be extended beyond the end of 2012. But there are no signs that taking such action is on the Congressional radar.
To be sure, borrowers still have until the end of this year to take advantage of the old law. It generally takes so long to process foreclosures, however, that the deadline for tax absolution may already have passed by the time a house is foreclosed upon.
Source: "Debt-relief window closing soon," Chicago Tribune, 1-13-12