Mortgage Debt Forgiveness In 2014

When debt is forgiven, the debtor has taxable income under Internal Revenue Code Section 108. This is the general rule, but to deal with the foreclosure crisis Congress created an exception for the cancellation of mortgage acquisition indebtedness on the taxpayer’s principal residence of up to $2,000,000.  Acquisition indebtedness also  includes refinancing of the mortgages used to purchase homes to the extent the refinanced amount does not exceed the original indebtedness.

Unfortunately for many homeowners the exception for taxation of home mortgage indebtedness expired at the end of 2013, however there are still several rays of hope for persons going through a home foreclosure or a short sale.  In the first place in recent years Congress has seemed unable to get their work done by year end, and they have fallen into a habit of letting  tax breaks expire through inaction, which they eventually get around to reenacting retroactively.  Many people are thus predicting that our lawmakers will still extend the treatment of mortgage debt forgiveness at least through 2014.  

There are also two other exceptions to the cancellation of indebtedness income that often apply to taxpayers losing their homes. These are bankruptcy and insolvency.