IRS may go after underwater homeowners

Homeowners who were underwater on their homes but who took advantage of mortgage relief programs face the prospect of the IRS calculating the amount by which a portion of their loan was forgiven as income.

From Distressed homeowners seeking mortgage relief could get stuck with higher taxes – The Washington Post:

Struggling homeowners across the country could face significant new tax bills if they receive mortgage relief from their banks, a prospect that threatens to slow the housing recovery and put further strain on distressed borrowers.

The collapse of the housing market and plunging home prices left millions of people stuck owing more on their mortgages than their homes were worth. Some have worked with their banks to reduce the loan amount to avoid foreclosure or enable a sale.

In 2007, Congress adopted a law that spared those homeowners from being taxed on the amount of the loan that was forgiven.

But that tax break expired in December, and now the forgiven debt can be counted as income by the IRS. Housing advocates worry that the lapse could scare homeowners away from making a deal with their bank, which could disrupt efforts to reduce foreclosures and harm borrowers who were just getting back on their feet.

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There is an effort in Congress to re-instate the law that has expired along with other tax breaks, but the linked article says its prospects are uncertain.