The bad news, via Huff Post:
Beginning on Jan. 1, people who lose their home to foreclosure will be required to pay federal taxes on any unpaid mortgage the bank can't recoup through an auction. The same will be true for homeowners whose loan principal is reduced by a mortgage modification, with the wiped-out loan being treated as taxable income.
This is violently unfair. Yet, if you purchased a property as a business, you'd be able to write-off the loss. The exemption in the Mortgage Forgiveness Debt Relief Act expires at the end of the year, but there's a chance it could be renewed:
House Minority Leader Nancy Pelosi (D-Calif.) believes that the mortgage relief provision will be on the table during the grand-bargain talks, according to communications director Nadeam Elshami.
"Extension of this tax provision has passed by a bipartisan vote in the Senate Finance Committee, and we anticipate that it will be part of Congress' year-end negotiations," Elshami said. "Democrats hope to work with the House Republican leadership to support bipartisan measures which benefit the middle-class homeowners."
The renewal of the exemption is mandatory. If it's allowed to expire, underwater homeowners ought to riot in the streets.