As a result of Congress reaching a settlement in the recent “fiscal cliff” negotiations, the Mortgage Forgiveness Debt Relief Act – previously scheduled to expire at the end of 2012 – has been extended for another year. Mortgage Forgivenesswas first introduced in Congress on September 25, 2007, and became law on December 20, 2007. The act offers relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar years 2007 through 2009. The renewed measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction), or foreclosure.
“Pease Limitations” is also under the agreement, which will reduce the value of itemized deductions permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. The thresholds have been increased and are indexed for inflation so will rise over time.
Under the formula, filers gradually lose the value of their total itemized deductions up to a total of a 20 percent reduction. Capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples. The maximum amount that can be treated as qualified principal mortgage debt under the act is $2 million, or $1 million if married filing separately. Second mortgages are eligible if they were used for home improvements. Struggling homeowners who are considering a short sale or loan modification will be eligible for tax relief through Dec. 31 under the act passed in 2007 and originally scheduled to expire in 2009.
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