We’ve written before about the tax consequences of foreclosure. In some cases, foreclosure can result in the homeowner being charged with tax liability for the amount of debt forgiven by the mortgage company. If the debt is $275,000, and the house sells at a sheriff sale for $250,000, the remaining $25,000 forgiven may be charged as income to the homeowner. The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude this tax liability if it’s for a mortgage on their principal residence.
The original law was scheduled to expire at the end of 2012, making it much harder for homeowners facing foreclosure. If the foreclosure happened in 2013, the homeowner could get slammed with tax liability for the foreclosure, adding insult to injury.
As part of last week’s fiscal cliff deal, the Act was extended through 2013. So this time you can credit Congress for doing something right, and the extension was even passed (almost) on time.
So if you’re going to get foreclosed on, it might be smart to do this before the end of the year.