The Debt Forgiveness Act has been extended through December 31, 2013. With this extension, the homeowner who has sold his house as a short sale or who has been foreclosed on can exclude from gross income any discharge or waiver of deficiency of any qualified principal residence indebtedness.
Normally, when a debt is forgiven, the homeowner receives a 1099, creating ordinary income for the forgiven debt. This extension states that if the debt forgiven was for the borrower's residence and the loan was for the purchase, refinance, or improvements to the residence, then the homeowner is not obligated to pay any tax on this phantom income.
The Debt Forgiveness Act is one of the only attempts the Federal Government has gotten right with the housing crisis. It would be ridiculous to create income tax on the homeowner who has lost his house to a short sale or a foreclosure. With the extension of this law through 2013, the underwater homeowner should consider whether the time is right for a short sale.
P.S. Even if the debt forgiven does not qualify as a principal residence debt, there are other possible exceptions available to the Borrower. This underwater Borrower should consult a CPA or tax professional.
Contact me at 434-951-0858 or Tucker@TGBLaw.com if you have questions.
William D. Tucker, III
Tucker Griffin Barnes P.C.
Charlottesville, VA 434-973-7474
Lake Monticello (Palmyra, VA) 434-589-3636