The Mortgage Forgiveness Debt Relief Act of 2007 is due to expire at the end of the year. It is one of the many issues bundled up in the infamous "Fiscal Cliff" negotiations. If the Act is not extended, homeowners who have debt forgiven in a short sale, loan modification or foreclosure will owe the IRS income tax on the forgiven debt.
Suppose a person owes $200,000 on his house, and it is sold in a short sale for $125,000. This seller will get a IRS form 1099 showing $75,000 income, and he will be expected to pay income tax on money he never had. It's pretty obvious that someone who qualified for a short sale does not have tens of thousands of dollars to give to the IRS. I fail to see how we will reduce the deficient by sending tax bills to people who don't have the ability to pay them.
Read more on CNN.com. To get the official IRS take, check here. And of course consult a tax expert if you are facing short sale, loan modification or foreclosure.
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