In many situations, when you have a debt cancelled or forgiven, it is considered income and can be taxable. When you short sale your home, the amount of debt forgiven can be quite substantial. Because most Short Sales are the result of hardship, it would be very difficult to meet this extra tax burden. Thankfully, the Mortgage Debt Relief Act of 2007 was established to prevent this.
The Debt Relief act allows those who have had to short sale their home, to exclude the debt forgiven from their income. This requires that the short sale be on the seller's principal residence. Debt can also be reduced through mortgage restructuring or loan modification. This debt forgiveness also qualifies under the Debt Relief act to be excluded from income.
The scope of the debt relief act covers debt forgiven during 2007 - 2012. There are some restrictions on how much debt forgiveness can be excluded under the act. If filing as an individual only $1 million can be excluded. If married filing jointly up to $2 million debt forgiveness can be excluded. There are other exclusions and fine print, so buThe exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:
About the Author:
Utah Dave - Daybreak Neighboorhood Expert and Local Resident
My friends nicknamed me Utah Dave in high school because they said it didn't matter where we went in Utah, I would know how to get there and who we needed to talk to. The name sticks today as UtahDave has formed into a professional real estate network of Neighborhood Experts all across the state. I live in Daybreak with my wife and 4 amazing children. I enjoy dancing (which is how I met my wife Dawn) as well as traveling, coaching, and learning.
