Minneapolis, MN: When debt is relieved or written off… That “relief” is supposed to be taxed as income. The lender gives the debtor a Form 1009-C, Cancellation of Debt if the cancellation equals $600 or more. When it comes to a foreclosure or abandonment of secured property, it is a form 1099-A.
That means if someone owes $150,000 on their home and it sells for $100,000 in a foreclosure auction, they could owe taxes on the remaining $50,000. For someone in the 25% tax bracket, that would mean paying $12,500 in taxes on the foreclosure. Similar taxes would apply for amounts that were forgiven in short sales and principal reductions.
The Mortgage Forgiveness Debt Relief Act of 2007 basically said that mortgage lenders were not to give the 1099 for foreclosures, saving those who have already lost a home significantly on their taxes.
The Mortgage Forgiveness Debt Relief Act was set to expire Dec 31, 2012., and that scared a lot of people. Fortunately, Congress wisely EXTENDED the Act as part of the Fiscal Cliff Negotiations for at least another year.
The clowns in Washington usually mess things up… But they got this one right!