Tax relief on forgiven debt set to expire Dec. 31, 2012

Tax relief on forgiven debt set to expire Dec. 31, 2012
Unless Congress and the California State legislature take action, a break for mortgage principal forgiven in loan modifications or short sales will expire at year’s end.
California’s tax treatment of mortgage debt relief income is set to expire at the end of 2012. For debt forgiven on a loan secured by a “qualified principal residence,” borrowers are exempt from both federal and state income tax consequences, but only until Dec. 31, 2012.  Tax breaks apply only to debts discharged from 2009 through 2012.
Sellers who have transactions closing after Dec. 31, 2012, need to speak to their own legal counsel or tax advisors about the impact of the expiration of these laws and their potential tax liabilities, including the applicability of other exemptions from debt relief income tax.
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