What Are The Tax Consequences Of A Short Sale?
Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. Therefore, a homeowner who sold their home for less than the mortgage amount could be taxed on the amount of the mortgage that was forgiven by the lender. In order to preclude the harshness of that law, The Mortgage Forgiveness Debt Relief Act of 2007 was recently enacted. Under the new Act, homeowners who have been granted forgiveness of a mortgage debt will not have to pay taxes if they can prove they are insolvent; or on their primary residence as long as the mortgage loan was used to buy, build, or substantially improve the primary residence. Debt used to refinance your home may also qualify for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. The Act does not apply to second homes, vacation homes, or investment properties. Because of the various unsettled questions regarding the Act, we recommend that you seek a qualified tax adviser to answer any questions involving your specific tax situation.