The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides a one-year extension of the exclusion from income for the forgiveness of debt on a principal residence. The exclusion is applicable to discharges of qualified principal residence indebtedness which occurred on or after January 1, 2007, and before January 1, 2014. During this exclusion period, taxpayers who are entangled in the current subprime mortgage crisis do not have to pay taxes for debt forgiveness on their troubled home loans.
Debt forgiveness relief was originally intended to be given to taxpayers through the Mortgage Forgiveness Debt Relief Act of 2007, for debts discharged after January 1, 2007 and before January 1, 2010. The 2008 Stabilization Act extended this relief to debts discharged before January 1, 2013.
Generally, the amount of the forgiveness of debt on a principal residence that is included in income is calculated as such. It the amount equal to the difference between the amount of the debt being canceled and the amount used to fulfill the debt. The tax on this income creates an additional burden for some taxpayers who are already struggling financially. The 2012 Taxpayer Relief Act provides relief from this burden so that taxpayers might experience a faster financial recovery. Incidentally, these rules generally apply to foreclosures or the exchange of an old debt for a new debt.
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