Is tax relief in sight for those who find their mortgages still underwater? Could be. In light of the recent settlement between Bank of America and the U.S. Justice Department, which could bring principle reductions to homeowners currently living underwater. The question is: What will the tax implications if principle reductions happen?
Under current law any reductions are considered to be regular income to the homeowner and, thus, will be taxed as such. Depending on the size of the reduction the potential tax bill could be large.
It should be noted that the Obama Administration allowed Mortgage Forgiveness Debt Relief Act of 2007 to expired on December 31, 2013. Congress is currently considering to extend that act for reductions obtained in 2014.
Personally I think the $19B fine Bank of America has to pay should be directed straight to the fixing the debacle at Veterans Administration.