Congress has renewed the exclusion for up to $2 million of forgiven debt on your primary residence.
Next year this will or would be great news for a client of mine. He’s going through a slow divorce and their home is in foreclosure. The bank apparently has been moving at a glacial pace and has not approved a short sale opportunity that has been presented to them.
But, if the divorce and foreclosure are closed in 2015: without the renewal of the exclusion both former parties are looking at significant tax bills for the debt forgiven. Basically say they owe $300,000 on the house. If they each get a 1099-C for $150,000 and they are in the 25% individual tax bract and this would push them to the 33% bracket. So lets just look at a 25% hit on the $150,000; their tax liability would be $37,500.
This has my client already considering bankruptcy as an option.