Mortgage Debt Forgiveness
On Dec 31 2012 the Federal and California Mortgage Debt Forgiveness Acts expire.
What happens if they don't extend the expiration dates?
Anyone doing a short sale or who is foreclosed on could possibly be liable for the debt relief.
What is debt relief?
Debt Relief is the difference between what you owe and what the bank accepts in the case of a short sale or the difference in what you owe and how much the bank sells the home for in a foreclosure sale.
How is debt relief taxed?
The debt relief is added to your income. Example, your yearly income is $50,000 and you received $50,000 in debt relief. Your income for that tax year would be $100,000 and you would be liable for the income tax on that amount.
Even if you sell your home before the Debt Relief expires. You still need to prove you are insolvent, where your liabilities exceed your assets.
You can check to see if you may be insolvent. I have included this link to the IRS Insolvency Worksheet.
http://www.edsellsre.com/Insolvency_Worksheet.pdf
I'm not a tax professional and you should always consult a licensed tax professional.
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