As part of its end of the year budget deal, Congress extended an important tax break for homeowners who benefited from mortgage debt forgiveness in 2014. As The Washington Post reports, extending the Mortgage Forgiveness Debt Relief Act through Dec. 31, 2014 will be a big relief for qualifying homeowners:
The federal tax code treats forgiven debt as ordinary income to the borrower, taxable at regular rates. But under an exception that took effect in 2007, qualified home mortgage debt that is canceled by a lender as part of a short sale, loan modification or foreclosure is treated as nontaxable. However, that exception expired at the end of 2013 and its renewal had been in doubt for all of 2014, leaving short-sellers such as Foster unsure whether they would be facing crushing taxes in 2015.
You can find additional information about the tax consequences of mortgage debt forgiveness on the Internal Revenue Service website.