Many tax payers might find it helpful to figure out what tax consequences of tax debt forgiveness on mortgage are. It has been a rough time in the housing market for last few years. The housing bubble didn’t just burst but it blew up the way a hydrogen bomb does. Sadly, the result of this disaster was many people losing their homes through foreclosure or short sales. There are tax consequences for both events.
What is strange about the federal tax code caused some repeated comments by many people. Possibly it is not stranger than when we think about how to handle debt that is forgiven. Why? The tax code is set up in such a manner that the relief of debt is considered to be an income. If you owe $100,000 on your home and short sell it for $50,000 which is less than what you owe, technically your gain would be of $50,000 on your income and you need to pay taxes on it.
Since the government has acknowledged by now that most people are in bad condition if they lose their homes. To deal with the situation, they’ve come up with some legal regulations that help people avoid the income tax consequences of tax debt forgiveness on mortgage for the years 2007 through 2012. The legislation is called the Mortgage Forgiveness Debt Relief Act of 2007.
The procedure works quite simply. You can get exempted from paying income tax on up to one million dollars in mortgage debt forgiven if you are a single individual or two million if you are a married couple. The debt must be applied to your primary house estate. It applies to the money that was spent to buy or build the house. It applies as well to any refinance debt that was used to make home improvements. It doesn’t cover refinance money that was spent for other purposes.