BiggerPockets

Forgiven debt is considered income for tax purposes. I believe that it would be ordinary income, not capital gain, which makes it even worse. However, if it is a primary residence there was legislation passed that excludes forgiven debt from income. If it is an investment property you may be stuck with the taxes. You probably want to consult with a tax pro on this.

:cool:

Is it the same property you discuss in this thread? That sounds like a rental. If so, yes, there will be taxes on the forgiven debt, and, as Richard points out, its ordinary income, not capital gains.

The exception Richard mentions is for forgiven debt on a primary residence, and only for acquisition or improvement debt. It you did a cash out refinance or a HELOC and used the money for something other than improvements to the property, the exception doesn't apply.

I asked some questions in that other post that are relevant here. What's your personal financial situation? There's another way to avoid these taxes, and that's to show insolvency. But if you have income and assets, you won't be able to do that. But if you have income and assets, you're not going to be able to do a short sale to start with.

Call you lender(s) and explain the situation and see what they might be willing to do. Paying taxes on any forgiven debt is probably inevitable, though, short of declaring bankruptcy.

"The Mortgage Forgiveness Debt Relief Act of 2007 " is what I was referring to.

The simple answer on the tax question is it depends - check out the link below as you may have to pay and you may not .....

http://www.irs.ustreas.gov/newsroom/article/0,,id=174034,00.html