The exception for “qualified principal residence indebtedness” was created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners whose mortgages have been restructured to prevent foreclosures, or those who have gone through “short sales,” selling their homes for less than what is owed in mortgages.
The exception allows homeowners to exclude from their income certain cancelled debt on their principal residence.
The relief act’s extension was seen as vital to the recovering housing market. Short sales nationwide had been surging in anticipation of the exception’s end on Dec. 31. The exception will now expire on Dec. 31, 2013.
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable.
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven.
The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
RealtyTrac reports that a total of 193,059 U.S. properties in some stage of foreclosure or bank-owned (REO) were sold during the third quarter of 2012, an increase of 21 percent from the previous quarter, but down 3 percent from the third quarter of 2011.