10 Sep Tax on Debt Forgiven through a Foreclosure
Income Taxation on Debt Forgiven through a Short Sale or Foreclosure
The longstanding law is that the amount of any debt which is written off or “forgiven” by a lender is considered income to the person who otherwise owed the money. The lender issues a 1099-C to the borrower and sends a copy to the IRS. In 2007, with the real estate bubble bursting, and many homeowners finding themselves “upside down” in their homes (owing more than it’s worth) the U.S. Congress passed a law exempting most mortgage debt forgiven through short sales and foreclosures from income taxation. The law exempted up to one million dollars of debt forgiven on a principal residence per individual owner and was extended through 2014. Despite ongoing speculation as to its renewal, especially in light of the legislative posturing preceding the elections in 2016, the exemption has NOT been extended to apply to debt forgiven in 2015. Obviously this is an important factor in a homeowner’s decision as to what to do about their underwater home. We will continue to monitor this situation closely and report any developments.
For more information on this and other real estate tax laws, please contact our office.