Even though many predicted the Mortgage Forgiveness Debt Relief Act (set to expire this year) wouldn’t get an extension, President Obama’s administration has included an extension in its 2013 budget proposal. The Act, passed in 2007 at the height of the financial crisis, was created to relieve homeowners who owed taxes on forgiven mortgage debt, allowing the borrower and the lender to work more freely together on mutually beneficial grounds. Without the extension, a borrower would face income tax with the short sale of their house.
Under the Mortgage Forgiveness Debt Relief Act, up to $2 million of debt elimination will be tax-free. The extension of this Act would apply to debt forgiven before January 1, 2015.