Families who lost their homes to the foreclosure crisis this year will have at least one reason for cheer this holiday season: They won’t have to worry about a big tax bill.
Shortly before adjourning last week for the year, Congress approved a tax-relief bill designed to help families who had a portion of mortgage debt forgiven. Some families have had such debt forgiven through a foreclosure, a short sale or a loan restructuring that enabled them to stay in their homes. (In a short sale, a home is sold for less than the amount of the loan.)
Ordinarily, forgiven debt is treated as taxable income. In the past, families who lost homes because they couldn’t afford mortgage payments were sometimes stuck with a huge tax bill.
The tax “is a double whammy, and it’s kind of a surprise whammy,” since most don’t realize that forgiven debt is taxable, says Mel Schwarz, partner at Grant Thornton’s national tax office.