Explore Properties at Southern California: Home Sellers Need Income Tax Relief After Short Sale Debt Forgiveness

Home sellers should get professional tax advice and plan for possible income tax relief prior to short sale debt forgiveness by lender/lienholder.

Question: Is there relief or any tax implications on short sales? For example, if one loses his job due to illness and goes on Social Security Income and is no longer able to pay the mortgage on a second property and it is sold by the bank, will the bank automatically send a document regarding the difference between the loan balance and the sale of the property to the loan holder? income tax and real estate

Answer: Yes, there is federal tax relief available if you enter into a short sale and, as a consequence, have debt forgiven from your lender. However, this cancellation of debt tax relief under the 2007 Mortgage Forgiveness Debt Relief Act is only for your main home. Since you say this is a second home and NOT your principal residence (main home), you would not qualify for cancellation of debt tax relief from this law. Only canceled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

The IRS provides complete mortgage forgiveness debt relief and debt cancellation information on a comprehensive webpage. Also see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments is an excellent resource as it goes into detail about exclusions such as insolvency and bankruptcy. Here is link to the 2009 version of this IRS information guide.

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Source: OCRegister.com interview with Raphael Tulino of the IRS. This is for information only and not the providing of legal or tax services. If you are considering a short sale, you should consult with your income tax professional or lawyer about possible income tax consequences.

Harrison K. Long - solutions for real estate and business - REALTOR® and broker associate, GRI - Coldwell Banker Residential Brokerage - 949-854-7747 (phone) - ExploreProperties@gmail.com (email) - CA DRE 01410855 - SFR short sale and foreclosure resource certified by the National Association of REALTORs® - also now serving as director at California Association of REALTORs®.