|Homeowners who lose their homes to foreclosure or short sale will not be taxed when the mortgage owed exceeds the value of the home. |
The "American Taxpayer Relief Act of 2012" went into law effective January 2nd, 2013. Also known as House Resolution 8 (H.R. 8), it's passage by Congress was to ensure that the United States did not go over the popularly phrased "fiscal cliff".
Buried in the list of extensions is Sec 202, which is titled "Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness."
This provision extends the Mortgage Debt Forgiveness Act of 2007, which protects distressed homeowners from incurring a higher income tax bill after a short sale, deed in lieu arrangement, or foreclosure.
The Law as written states the following.
TITLE II—INDIVIDUAL TAX EXTENDERS
SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.