Article Highlights
• Forgiven
debt is taxable.
• Forgiven
home mortgage acquisition debt is excludable.
• Without
a last-minute congressional extension, the home mortgage acquisition debt
exclusion expires at the end of 2013.
When a taxpayer settles a debt for less
than its full amount, the forgiven amount of the debt is taxable, unless the
taxpayer qualifies for one of two currently available exclusions. With the
downturn in the economy and the accompanying drop in home prices that occurred
in recent years, many taxpayers are unable to keep up the mortgage payments on
their home, and unable to sell their homes because they owe more than the
market price. As a result, a large number of homeowners have let their homes go
back to the lender.
Congress offered help for those in this
situation by providing an exclusion from income of the forgiven acquisition
debt from a taxpayer’s principal residence. If a taxpayer’s home is upside
down, and they are considering letting it go back to the lender, they should be
aware that unless Congress provides a last-minute extension, this Principal
Residence Acquisition Debt Relief Exclusion will expire at the end of 2013. The
only other exclusion available is the insolvent taxpayer exclusion, which
limits the amount that can be excluded to the excess of the taxpayer’s total
debts over the taxpayer’s total assets.
An individual not able to exclude the
forgiven debt on their home using the insolvent taxpayer exclusion may wish to
act before year’s end. The tax implications of forgiven debt are very
complicated and not all the details are covered in this article. You are
strongly urged to contact our office if you are contemplating letting your
home go back to the bank.
(601) 649-5207
(601) 649-5207
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