Massachusetts Home Buyer Guide

Homeowners aren't the only people to benefit from a tax break for forgiven mortgage debt that was set to expire December 31, 2012, but was extended by Congress and President Obama when they narrowly averted the “fiscal cliff” crisis.

The tax break, which has been extended to the end of 2013, allows home owners facing short sales, reduced loan principals, or foreclosures to avoid paying federal taxes on any debt still owed to the bank. Otherwise, the debt would have been taxed by the Internal Revenue Service (IRS) as income.

Had the tax break not been extended, it is likely fewer sellers "underwater" on their mortgage would have listed their homes for sale for fear of incurring a large tax bill. Fewer homes for sale in Massachusetts would give home buyers even less options in a real estate market with declining inventory.  

Massachusetts homeowners should speak with a tax professional to discuss whether state taxes may be owed as a result of debt forgiveness after a short sale. Tax laws are complicated, and the answer will vary depending on the taxpayer. 

The debt forgiveness tax break first took effect in 2007 during President George W. Bush's second term.

Homeowners had rushed to complete short sales, which are infamous for the lenghty time such transactions take to reach closing, before the end of the year out of fear that the tax break would not be extended.