California mortgage assistance could lead to surprise tax debt

Many homeowners are currently enjoying some much needed relief on the principal of their mortgage loans. Although this relief has assisted many in either selling their home through a short sale or making existing monthly payments more affordable, a tax issue may be on the horizon for thousands of California homeowners. Lawmakers across the country have stated that, unless further legislation is passed, the mortgage assistance could result in the same homeowners being subject to a substantial amount of tax debt.

Since 2007, there has been a law in place that allows homeowners to be exempt from tax liability on certain mortgage assistance. However, this law is set to expire at the end of 2012. As a result, the assistance that is received to reduce mortgage obligations, which homeowners are required to report as income, may be subjected to taxation beginning in 2013.

By the end of June, it was reported that $10.6 billion of mortgage assistance had been given to homeowners. This assistance is being issued as part of the $25 billion national settlement that five of the nation's largest banks have been ordered to pay. With the end of the tax exemption, the assistance could be significantly diminished due to the new tax liability.

California homeowners already have a substantial amount to worry about in regards to keeping their home afloat. However, this burden could be made more severe if they face a tax debt as a result of their receiving mortgage assistance. In order to best prepare for such a circumstance, it may be in a homeowner's best interest to take preemptive measures to plan for such potential debt. By constructing a financial plan that takes into account this potential tax debt, homeowners can ensure that they remain financially solvent despite the added taxes that they may face. In the meantime, efforts are said to be underway in Congress to attempt to extend the exemption beyond Dec. 31.

Source: Arizona Daily Star, "Mortgage debt relief may bring tax pain," Sept. 10, 2012

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