Several weeks ago, Florida property owners started to receive mortgage balance reduction offers from the nation's biggest mortgage servicers under the settlement reached earlier this year in the federal government’s investigation into banks’ wrongful servicing of mortgage loans and fraudulent activity in prosecuting foreclosures. Under the terms of the settlement, five of the biggest mortgage lenders must put $17 billion toward debt relief that enables Borrowers to stay in their homes.
Currently, under the Mortgage Forgiveness Debt Relief Act of 2007, if the principal reduction or other debt relief was related to the mortgage on a Borrower's principal residence, the amount of the debt forgiven has been exempt from federal income tax. However, as of January 1, 2013, that provision expires.
If the Mortgage Forgiveness Debt Relief Act is not extended by Congress, Borrowers will have to count mortgage relief from lenders as income on their federal tax returns. That means a borrower would have to pay taxes on any forgiven debt granted through the massive mortgage settlement or after a
On August 2, 2012, the Senate Finance Committee passed a bill to extend the MDRA through the end of 2013, however, since then, there has been no further activity to extend the Act and with the election only a few weeks away, it is unlikely that the extension will be passed this year. However, it is possible that Congress will extend the exemption next year and make it retroactive to January 1, 2013. That, however, is no comfort to the thousands of Florida homeowners attempting to short sale their primary residence.
For more information on the taxability of cancelled debt, information is available on the IRS website at: