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Foreclosure tax exemption expiration leads to financial woes

Homeowners in Washington, D.C., who received foreclosure assistance and debt relief may be required to list that amount as taxable income, leading to massive tax bills for families who are already financially vulnerable. Tax exemptions for mortgage debt relief expired at the end of the year, causing scores of homeowners to be thrust into legal and financial limbo. Legislators say they are concerned about the expiration of the foreclosure relief tax exemption, as it has left hundreds of thousands of families in tight financial situations. Those families may have been able to save their homes by narrow margins, but they are now facing behemoth tax bills.

The tax exemptions were designed to help those who were facing foreclosure because they were 'underwater' with their mortgages; that is, they owed more on the loan than their homes are worth. Many people were seeking short sales in lieu of foreclosure. Those sales allow homeowners to sell their home for an amount less than they owe, which leaves the remainder as canceled debt. Now, that debt is considered income, similar to settling with a credit-card company.

One man said he is facing a $28,000 tax bill because he is planning to sell his house for $150,000, even though he owes $250,000 on his mortgage. If national legislators fail to extend the exemption, that $100,000 is considered income that is subject to tax penalties. Nearly 100,000 people used the tax exemption in 2011 - the most recent official number - and many are hoping that legislators extend the benefits retroactively. Most families receive about $37,000 in debt reduction, which could lead to a $9,250 tax increase for those who fall into the 25 percent bracket.

Homeowners who are facing foreclosure have several options, but they should consult with a qualified attorney before making any choices. Short sales could pose significant financial problems that were not relevant in the recent past because of the tax exemptions. A local attorney may be able to answer questions and provide recommendations about your specific situation.

Source: The Boston Globe, "Homeowners who received debt relief may face large tax bills" Shaila Dewan, Feb. 08, 2014

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