Fiscal Cliff-Hanger: Cancellation of Debt Exclusion Extended!

In the recent “fiscal cliff” tax bill just passed by Congress, the cancellation of mortgage debt relief provision was extended for one additional year, i.e. through the end of 2013.  (See,  Sec. 202 of bill.) For a summary of the entire bill, go to the Journal of Accountancy link here.   As before, the extension only applies to qualified principal residences, i.e. those in which the homeowner used the borrowed funds to buy, build, or substantially improve the home and lived there for two of the last five years.

However, in the slow motion world of Big Bank foreclosures, loan mods, and short sales, that is not a lot of time.  To put a fine point on it, if you’re not already in default, it is likely a foreclosure will not be completed in 2013.  Same for loan mods, since most lenders balk at helping borrowers who are not in extremis.  This is why short sales represent the last and best hope for homeowners struggling to get their distressed housing issues behind them AND avoid having to pay taxes on cancellation of debt.  More about this later.  – PCQ