Since the recession began several years ago, many homeowners have had difficulty making mortgage payments. Foreclosure rates have increased and left many California homes empty. Usually, if a bank provides debt relief to a homeowner through a foreclosure or a short sale, the homeowner must pay income taxes on the amount of debt forgiven.
In 2007, though, the government passed the Mortgage Forgiveness Debt Relief Act. This act means homeowners only have to pay taxes on mortgage relief that exceeds $2 million. The act was extended in 2010 and is now set to expire at the end of 2012. Unless the act is extended again, all homeowners will have to pay taxes on mortgage relief in just a few months.
To make matters even worse for struggling homeowners, the expiration of this act coincides with required payouts from banks for alleged foreclosure abuse. Many homeowners will not receive their payment from the bank until after December 31, 2012. Since this money will most likely be considered income at that point, they will owe taxes on the payment from the bank.
Many families struggling to make mortgage payments and get out of debt have probably done nearly everything they can to improve their financial situations. Foreclosing on a home is one way to find some financial relief. However, when the Mortgage Forgiveness Debt Relief Act expires, many people's financial situations might look more dismal.
Consulting a legal professional may be a beneficial way to recover financial security. Worries over mortgages, debts and taxes can make life challenging. Getting help resolving issues relating to these stressors could eliminate some anxiety.
Source: Los Angeles Times, "Mortgage debt relief may bring new pain: a tax bill," Jim Puzzanghera, Sept. 7, 2012