In what comes at great news and a sigh of relief for millions of underwater homeowners, Congress has extended the Mortgage Debt Forgiveness Act. The extension came as part of the “fiscal cliff” of 2012 vote.
What the extension means for homeowners is that they will not have to pay tax on the mortgage debt forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including principle reduction) or foreclosure. For example, if they paid $200,000 for their home but sell it for $100,000, they would not have to pay tax on the $100,000 deficiency that’s forgiven by the mortgage holder.
Other homeowner benefit extensions include being able to deduct your private mortgage insurance for those who make less than $110,000 a year. This is retroactive back to 2012 and includes 2013. In addition, a tax credit of up to $500 is available to homeowners who made energy improvements to their home in 2012. This is also available in 2013.
As part of the vote, the capital gains rate was increased from 15 percent to 20 percent for high-income earners, but the capital gains rate on the sale of principal residences remains unchanged. It continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
The Mortgage Debt Forgiveness Act now expires on December 31st, 2013.