Again, 2013 was a year in which many homeowners – or former homeowners – took pains to use their newly stable incomes to heal the financial wounds of the recession. For many, this involved settling debts with former lenders on homes that were foreclosed, short sold or even retained with defaulted second loans or home equity lines of credit.
Normally, defaulted mortgag...e debt that is forgiven through a foreclosure, short sale, deed in lieu of foreclosure or settlement via partial payment is actually charged to a taxpayer as income. It's called Cancellation of Debt Income, or CODI. Under the 2007 Mortgage Debt Forgiveness Relief Act, though, the IRS has temporarily exempted CODI from incurring income-tax liability for as many as 100,000 homeowners a year, to avoid penalizing homeowners for these sorts of settlements and resolutions to upside-down home mortgages.
The act expired on Dec. 31, though talks are ongoing about extending it into this year. If you were one of the hundreds of thousands of American homeowners who was able to close a short sale or settle a defaulted home loan in 2013, chances are good that you are eligible to tax advantage of the CODI tax break when you file your 2013 return.