The Mortgage Forgiveness Debt Relief Act is a government bill that offers relief to most homeowners who would normally owe taxes on the forgiven debt after performing a short sale. The purpose of this act is to help homeowners avoid additional financial hardship by performing a short sale. This Act became a law in 2007. Prior to this act the borrower would have to pay taxes on their forgiven debt. With this act in place, a borrower does not have to pay income tax on forgiven debt in MOST cases.
You should consult a CPA for information on the tax ramifications of a short sale in your specific case. Please be advised that I am not a CPA and the following information should be taken as tax advice.
It’s important to know that when performing a short sale you will always receive a 1099 on the debt forgiven. The question is whether or not you will be held liable to pay the taxes on the forgiven debt. From my understanding if the property is your primary residence and is purchase money you should not be held liable to pay the 1099 under the Mortgage Forgiveness Debt Relief Act. If the property is an investment property you will receive a 1099-C if a short sale is completed and a 1099-A if the property is foreclosed on. In MOST cases you will be held liable to pay taxes on the debt forgiven. When an investment property is foreclosed on typically the 1099 is larger than if a short sale is completed.
The Mortgage Forgiveness Debt Relief Act has a set expiration date of December 31, 2012. It may or may not be extended. If it is not extended this will be a devastating blow to homeowners as they will be held liable for their 1099 on the debt forgiven when performing a short sale.
We have a network of CPA, Accountant’s and Tax Professionals that work directly with our clients to help them navigate these rough waters.