A recent tax law change has been enacted that addresses issues brought about by the subprime lending crisis. This change provides relief to homeowners whose mortgage debt is forgiven. Prior to enactment of this law, a homeowner could be taxed on the amount of forgiven mortgage debt. For example, before this law, an individual with a $200,000 mortgage whose lender foreclosed on the home and sold it for $180,000 would have had to report $20,000 of income from the forgiven debt. The result would have been the same if the lender restructured the loan and reduced the principal amount to $180,000. Under the new law, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a qualifying loan secured by a qualified principal residence. The change applies to debts discharged from January 1, 2007 to December 31, 2009.
Source: Hall Estill Tax and Estate Planning Newsletter (www.hallestill.com)
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