Congress finally arrived at a settlement in the “fiscal cliff” debacle late last night. As a result, the Mortgage Forgiveness Debt Relief Act has been extended for another year. This will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders agree to a short sale, loan modification (including any principal reduction) or foreclosure.
If you are short saling your home, keep on rolling with it if it makes sense for you and be sure to consult with your own tax adviser about your tax situation.
The settlement additionally allows capital gains rates to increase from 15 percent to 20 percent for high-income earners. Capital gains rates on the sale of principal residences, however, will remain the same and continue to exclude the first $250,000 for single taxpayers and $500,000 for married couples.