Though the $2-million exclusion for waived debt on a main home has lapsed… Debtors who aren’t personally liable for the deficiency needn’t worry, IRS says in a private ruling involving the tax consequences of foreclosures and short sales. Many states, such as Calif., bar lenders from going after borrowers for any shortfall when the value of the transferred home is less than the amount of the mortgage on it.
In that case, the amount of the forgiven debt isn’t treated as debt cancellation income, so the $2-million exclusion never applied. Instead, the amount of the waived debt is included in the amount that the seller realized for figuring gain or loss on the sale, and if the house is the seller’s primary home, up to $500,000 of gain can be excluded. Congress will act to help debtors who are on the hook for the shortfall and who need to use the $2-million exclusion to avoid a large bill for income taxes. Later this year, lawmakers will reinstate the exclusion, retroactive to Jan. 1, 2014.