Big Change for Primary Residence Debt in 2017

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Prior to January 1, 2017, if you had lost your home due to foreclosure or did a short sale, the debt that was forgiven was exempted from tax. Normally, debt that is forgiven is called Cancellation of Debt Income (COD Income) and is subject to regular income tax. There are a few exceptions and it used to be that the debt on your home was one of those.

This tax provision expired at the end of 2016 and so some people with upside down primary residences are wondering what to do now. If they walk away from their homes, they don’t get a write-off from the loss. Instead they get taxes. That really doesn’t seem fair. Talk about getting hit with another punch when you’re already down.

We had hoped that a bill introduced January 2017 would extend the exclusion from home mortgage income debt forgiveness. Or, even better, make the exclusion permanent. Unlike a real estate investment, if you lose money on your primary residence, you don’t get a write-off. And if there is debt forgiveness you have taxable gain.

Right now, there are still a few ways that you may be able to get an exclusion. If the bill passes in the next few months, it will hopefully be dated back to January 1, 2017. But if it doesn’t, one of these options may help you. Exclusions include:

  • Debt cancelled in a Title 11 bankruptcy,
  • Debt cancelled when you are insolvent,
  • Qualified farm debt canceled,
  • Qualified real property business debt canceled, or
  • Primary residence debt discharged in 2017 that was part of a written agreement in 2016 or prior.

Talk to your CPA before year-end to see if you can qualify for one of these exclusions.

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