30 days to go until January 1, 2014 when forgiven debt from the disposition of a principal residence - exempted from income tax since the Mortgage Debt Relief Act of 2007 went into effect, will again become taxable. This is not the first time this law has had to be revised for an extended date, and each time it was extended the extension occurred at the last minute – or even weeks after it expired.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through December 31, 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
The law was explained in my prior blog articles:
MORTGAGE RELIEF ACT – ANOTHER LOOK
CONGRESS AT WORK –
There is an extension bill afoot – and it has been “in House committee” since July 23, 2013. It is a very complicated bill, and you can see it through this link:
https://www.govtrack.us/congress/bills/113/hr2788/text
Actually I’m kidding. The bill is all of one page long and consists of a thimble full of words – enough to change the expiration date from January 1, 2014 to January 1, 2016. Congress must, however, think the implications must be significant being it is sitting in committee for 5 months. Maybe they think the totality of the foreclosure / recession fallout will be over in 30 days? More likely the discussion will be thrown back and forth between the House and Senate committees to decide it if should be 2015 instead of 2016 (that is my bet!).
YOUR REALTOR CALL TO ACTION!!!
So it is time to write your Congressman/woman and your Senator to tell them about HR2788/HR2994 (House version) and Senate Bill 1187 (they have had it in committee a month longer!).
There are alternatives to not having to pay for the income generated by the forgiven debt. These are discussed in detail in my articles referred to above. But in summary they include the “insolvency test” of the taxpayer just before the debt forgiveness – this is a total asset solvency vs. total liabilities test; and the elimination of the debt being forgiven before the lender has a chance of forgiving it. This is done through bankruptcy, but timing for the bankruptcy is most important for this to work.
The name and address of your Congressman and Senator can be found at the respective hyperlink in this sentence. Write to them now to encourage them to get this bill out of committee and onto the President’s desk.
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© 2013 Richard P Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq.
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