Just in the nick of time, the United States Congress extended the Mortgage Forgiveness Debt Relief Act through the end of 2013. It was scheduled to expire on December 31, 2012.
What Is the Mortgage Forgiveness Debt Relief Act?
If your lender forgives part of your mortgage debt (perhaps because you’ve modified or restructured your loan, gone through a short sale, or lost your home to foreclosure), you would normally be required to pay taxes on the amount forgiven. This is because the IRS considers the forgiven loan to be income.
However, in order to protect homeowners from these huge tax bills, in 2007 Congress passed the Mortgage Forgiveness Debt Relief Act. The Act gives homeowners a break, stating that they don’t have to pay tax on forgiven mortgage debt in certain circumstances. (To learn about those circumstances, see Canceled Mortgage Debt: What Happens at Tax Time?)
The Act was scheduled to expire on December 31, 2012 (it had already been extended once).
Tax Relief for Homeowners Continues Through 2013
As part of the recent legislation to avoid the fiscal cliff, Congress extended the tax relief of the Act through the end of 2013. That means that if you meet the qualifications in the 2007 law, you can get tax relief for mortgage debt forgiven through December 31, 2013.