04/10/2014 01:20 pm ET Updated Jun 10, 2014

What You Didn't Know About Forgiven Mortgage Debt

As April 15, better known as Tax Day nears, homeowners with forgiven mortgages are reminded of the taxes they must pay on their buyout from the bank.

On December 31, 2013, the tax exemption for mortgage debt forgiveness expired, leaving financially struggling homeowners with a big return to file. Prior to the expiration of the exemption, when an underwater home -- a home with a larger outstanding mortgage than value of the property -- was foreclosed on and taken by the bank, the mortgage debt would be forgiven with no taxes owed. However, now if the bank forgives your mortgage loan, the government will see that loan as taxable income. So although you are off the hook with your mortgage, you are still going to potentially owe a lot of money.

The New York Times cites the example of a homeowner who owes $250,000 on his mortgage with a $150,000 buyer, but still has to pay taxes on the $100,000 difference forgiven by the bank, totaling $28,000.

Even though there still remains a high number of underwater mortgages, the number is on the decline with 6.4 million underwater in the third quarter of 2013 from 7.2 million the previous quarter. The increase in home values has influenced this trend, with New York City having particularly low amounts of underwater mortgages and especially high home prices; the average Manhattan apartment sales price in the first quarter of 2014 was almost $1,800,000. Perhaps the co-op board's strict guidelines and financial credentials have also helped NYC have a low number of underwater mortgages and foreclosures.

Regardless of the decline, many of those relieved of their mortgages by the bank are unaware of the expired tax exemption and still remain in trouble when they get their annual tax bill. Have you or anyone you know been affected by the tax on mortgage debt forgiveness? Leave your stories below, I'd love to hear them.

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