Good Morning Gentle Readers,
Pretty sure that most TWC readers are financially diligent enough that this isn't an issue. However, you just might know somebody that wasn't. For those who bet on the come, rolled snake eyes, and lost their homes due to foreclosure, there is a smidge of good news. Forgiven debt in connection with a foreclosure in 2007, 2008, and 2009 will not be treated as taxable income.
Say what? How is it that forgiveness of debt can morph into taxable income anyway?
Hah, says TWC, this is the U. S. of A. and twisting concepts until they scream UNCLE (Uncle Sam, that is) is more than a middling pastime for government lawyers, CONgress, and such. In most cases, a relief of liability for a debt translates into income to you, Taxpayer. So buck up. Here's the rules:
- The tax relief applies only to your principal residence. That means the house you live(d) in full time. If you lost a vacation home or investment property the general rule still applies: The amount of forgiven or canceled debt is taxable income to you (unless you are in bankruptcy or insolvent).
- A maximum of two million dollars of forgiven debt can be excluded from income.
- The eligible loan must have been secured by your principal residence and the money must have been used to buy, build, or substantially improve the property. If part of the forgiven debt was a home equity loan or cash-out refinancing used for other purposes, that part would be considered taxable income.
TWC's take on the subprime fiasco is here.