Friday, January 1, 2010

From the Tax God: Losing a Home? A Tax Bite May Be Next

From MSN Money.

Did you know that debt relief of any kind is counted as income unless there's a tax break for it?

"The basic tax rule on debt discharge is simple: If a lender cancels your debt, that's taxable income to you, and you and the Internal Revenue Service will get a 1099-C form, and you will have to pay tax on that forgiveness.

But Congress gave homeowners a big gift with the Mortgage Forgiveness Debt Relief Act of 2007. It excludes as much as $2 million in debt relief from income taxes through 2012.

It applies, however, only to debt on primary residences. If you had a mortgage canceled on your vacation beach condo, you could get stuck. And you'll still have to pay tax on relief from auto loans, credit cards and similar debts."

Not only would the relief be taxable as income, but the loss of other deductions, credits, and exclusions, as well as state-level taxes add to your burden. Also, any tax credits or other special programs you qualified for (fed or state) in recent years may come back to haunt you for repayment.

Owing the IRS is far worse than owing anybody else--you can't escape them.


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