The Problem of Mortgage Debt Forgiveness

The LA Times reports on the tax implications of mortgage debt forgiveness:

Under the federal tax code, if a lender forgives mortgage debt as part of a loan modification or other arrangement, that amount will be treated by the IRS as ordinary income and taxed accordingly. Typically the tax bill runs into the tens of thousands of dollars.

(Note to California homeowners: If your mortgage forgiveness occurred because of a short sale, you're exempt from the tax because of an IRS interpretation of state law.)

Two senators — Nevada Republican Dean Heller and Michigan Democrat Debbie Stabenow — have introduced a bipartisan bill that would extend the mortgage debt relief safe harbor for eligible homeowners through the end of 2016. Heller is a member of the tax-writing Senate Finance Committee and is in a strategic position to attach the bill to a larger piece of legislation that is moving through his committee — something he pledged to do.