Real Estate Tips and Information by Karen List

The new measure gives tax breaks to homeowners who have mortgage debt forgiven. Under the previous law, debt forgiven by a lender, such as short sales and refinances, was typically taxable to the borrower as debt discharge income. The Mortgage Forgiveness Debt Relief Act of 2007, states that a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
The tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).
To calculate the capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence. However, taxpayers can typically exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.