Many individuals in New Jersey and around the country who had some of their mortgage debt cancelled or forgiven after losing their homes due to a foreclosure or short sale now find themselves owing tens of thousands of dollars in taxes. For the last 10 years, up to $2 million in forgiven or cancelled mortgage debt was deductible thanks to provisions introduced in the wake of the 2008 financial crisis, but those tax breaks expired at the end of 2017.
Hopes that Congress would act to extend the tax breaks are dwindling as lawmakers turn their attention to impeachment proceedings and other matters, but relief is available under other parts of the U.S. tax code for individuals who are insolvent or going through a bankruptcy. However, individuals who hope to avoid tens of thousands of dollars in taxes by filing for bankruptcy may be wise to act quickly as the rules for discharging these obligations become far more complex once taxes have been assessed.
The housing market has rebounded in recent years thanks to a booming economy, but foreclosure rates are still worryingly high. Figures from the Mortgage Bankers Association reveal that more than 360,000 homes went into foreclosure in 2018. The National Association of Realtors spent more than $8 million in the third quarter of 2018 lobbying Congress to extend the tax breaks for cancelled or forgiven mortgage debt, but lawmakers have found groups advocating for tax relief on behalf of other sectors more persuasive.
Individuals who receive unexpected mortgage relief tax bills sometimes delay filing for bankruptcy because they are worried about losing their automobiles and other property. Attorneys with experience in this area could put these fears to rest by explaining that there are bankruptcy exemptions in place to protect assets like cars, tools that are used to earn a living and some other personal possessions.