Avoid Home Cancellation of Debt Income
Article Highlights
- Forgiven debt is taxable.
- Forgiven home mortgage acquisition debt is excludable.
- Without a last-minute congressional extension, the home mortgage acquisition debt exclusion expires at the end of 2013.
Congress offered help for those in this situation by providing an exclusion from income of the forgiven acquisition debt from a taxpayer’s principal residence. If a taxpayer’s home is upside down, and they are considering letting it go back to the lender, they should be aware that unless Congress provides a last-minute extension, this Principal Residence Acquisition Debt Relief Exclusion will expire at the end of 2013. The only other exclusion available is the insolvent taxpayer exclusion, which limits the amount that can be excluded to the excess of the taxpayer’s total debts over the taxpayer’s total assets.
An individual not able to exclude the forgiven debt on their home using the insolvent taxpayer exclusion may wish to act before year’s end. The tax implications of forgiven debt are very complicated and not all the details are covered in this article. You are strongly urged to contact this office if you are contemplating letting your home go back to the bank.
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