On January 3rd, 2013 President Obama signed the American Taxpayer Relief Act of 2012. One of the many items within the bill is the “Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness.” This extension lasts for one year and ends on January 1, 2014.
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What Does this Mean?
Homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have to pay taxes on the loss up to $2 million ($1 million if married filing separately).
Normally, with a few minor exclusions, when you borrow money from a commercial lender and the lender later cancels or forgives the debt, you have to include the cancelled amount in income for tax purposes.
When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.
The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Form 1099-C, once reported to the IRS becomes taxable income for the tax year in which it was reported.
Not only can this mean a potentially huge increase in the personal taxes you owe, completely wiping out any refund you were counting on, it can also kick you into a higher tax bracket!
With this extension, homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have to pay taxes on the loss up to $2 million ($1 million if married filing separately) through January 1, 2014.
If you don’t know of a Real Estate agent that can help, I would be happy to refer you to someone.
–Written on January 10, 2013.