Homeowners overwhelmed by debt could now face tax debt, too

On behalf of Bankruptcy Law Firm of Clare Casas on Saturday, December 28, 2013.

Before adjourning for 2013, the House of Representatives failed to extend the Mortgage Debt Forgiveness Relief Act. Without the act in place, any amount forgiven is treated by income by the IRS. This means that beginning on Jan. 1, 2014, tens of thousands of Florida homeowners already overwhelmed by debt could also end up with tax debt if they accept any debt forgiveness from their mortgage holders.

The odds of receiving some amount of debt forgiveness are high for many homeowners due to the National Mortgage Settlement. This settlement between the federal government and the five major banks that hold mortgages requires each bank to forgive a certain amount of mortgage debt. This automatically puts a homeowner in a difficult position without the Act.

Having a portion of principal forgiven may mean lower payments and the ability to avoid foreclosure, but at tax time, it could mean financial disaster. The average amount of debt forgiven for homeowners across the country from March 2012 through July 2013 was $108,000. For a great number of people, having an amount this high treated as income would create an impossible tax burden.

Many Florida homeowners overwhelmed by debt may consider filing bankruptcy to keep their home. Any debt forgiven during a bankruptcy is not counted as income for tax purposes. Negotiating a mortgage modification and a reduction in principal under the protection of the bankruptcy court could be a viable solution for many families struggling to make ends meet. People having trouble making their mortgage payments are ordinarily behind on other debt obligations as well. What begins as an effort to save a home and avoid a large tax bill could end up providing a family with a clean slate on which to rebuild its financial life.

Source: Al Jazeera America, Congressional inaction turns mortgage relief into tax burden, No author, Dec. 13, 2013

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