Mortgage Forgiveness Debt Relief Act of 2007
Today I want to discuss which of your Sellers may or may not be liable for a federal income tax liability as a result of a Short Sale.
Now keep in mind, in a Short Sale, you are asking the lender to forgive or cancel, the debt. And anytime debt is forgiven or cancelled this triggers taxable income. So, in order for lenders to be in compliance with the IRS, they are supposed to issue a 1099 to a Seller for the amount of the debt forgiven in a Short Sale.
Well, here’s the good news. In December of 2007, a very important piece of legislation was put into place entitled The Mortgage Forgiveness Debt Relief Act, which allows certain qualified taxpayers, with certain qualified residences, to exclude from taxable income any debt forgiven in a Short Sale. To qualify, the property must have been the Seller’s principle residence, and the debt that was forgiven must have been either on the original purchase money loan, a loan taken out to refinance the property, or a loan taken out to substantially improve the property.
If you would like to read a good, comprehensive summary of this piece of legislation, we would encourage you to visit the IRS’s website at www.IRS.gov.
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