In 2007, Congress passed a law, which was twice extended, exempting a homeowner from being taxed on debt that was forgiven as part of a short sale or a loan modification. Otherwise, canceled debt is treated as taxable income by the IRS.
Without the act and assuming a 28 percent tax bracket, every $10,000 in forgiven debt would make a homeowner liable for an additional $2,800 in taxes. The "extra" income could also push someone into a higher tax bracket.
But the Mortgage Forgiveness Debt Relief Act expired Dec. 31, and legislative efforts to extend the tax break and make it retroactive to Jan. 1 have faltered, stuck in committee.
Congress doesn't care about underwater home owners.
