Any forgiveness of debt is generally taxable income. In 2007 during the height of the housing crisis the Mortgage Debt Relief Act was passed. Under this Act any debt forgiveness after foreclosure or a short sale by a mortgage lender on a loan used to purchase a primary residence, or to make improvements to a primary residence, is not taxable income. This Act is now scheduled to expire on December 31, 2012.
The Act had originally been scheduled to expire on December 31, 2010, but was extended for two years until 2012 because the housing crisis still existed. Although the housing market today is stronger, the housing market is still not healthy.
The Senate Finance Committee with bipartisan support has now approved a bill to extend the Act for one year until December 31, 2013. The cost of this one-year extension will be $1.3 billion dollars.
After the election the Senate is expected to approve the one-year extension, but there is significant concern that, due to the $1.3 billion dollar cost and the reluctance to “bail out” homeowners who overextended themselves in their home purchases, the House of Representatives may not agree to the one-year extension.
The website www.govtrack.us is available to track the potential passage of this bill in Congress.