The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides a one-year extension of the exclusion from income for the forgiveness of debt on a principal residence. The exclusion now applies to discharges of qualified principal residence indebtedness occurring on or after January 1, 2007, and before January 1, 2014. During the exclusion period, taxpayers who are caught in the current subprime mortgage crisis do not have to pay taxes for debt forgiveness on their troubled home loans.
Debt forgiveness relief was originally granted to taxpayers through the Mortgage Forgiveness Debt Relief Act of 2007, effective for debts discharged after January 1, 2007 and before January 1, 2010. The 2008 Stabilization Act extended this relief to debts discharged before January 1, 2013.
In general, the amount of the forgiveness of debt on a principal residence that is included in income is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. The tax on this income creates an additional burden to taxpayers already struggling financially. The 2012 Taxpayer Relief Act provides relief from this burden so that taxpayers can recover faster. These rules generally apply to foreclosure or the exchange of an old obligation for a new obligation.
If you have any questions regarding this provision or if you have concerns regarding a home foreclosure, we can answer any questions and discuss your options in greater detail. Please call our office at (630) 986-0540 at your earliest convenience to arrange an appointment.