The Debt Forgiveness Act

It used to be that you owed income tax on any forgiveness of debt.

When a lender decides to forgive all or a portion of a borrower's debt, the forgiven amount is considered as income for the borrower and is liable to be taxed.

Here are the following ways you can qualify to short sale a property without any tax liability.

Short Sale of a Primary Residence: The Mortgage Forgiveness Debt Relief Act of 2007 (and it’s extension in the 2008 Federal Bailout) now allows you to short sale a primary residence without any tax liability.

Today when a homeowner short sales a primary residence, they can file a simple form and the forgiven debt is no longer taxable.

The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.

Short Sale of a Non-Primary Residence: If the property you are selling is not a primary residence, then you may be eligible for tax relief if you are considered insolvent.

I don’t know the exact guidelines, but insolvent is usually considered when your total gross debts are more than your total gross assets. I’m sure a good tax professional can give you more information.

Click here to view the IRS’s website about the Mortgage Forgiveness Debt Relief Act and Debt Cancellation  http://www.irs.gov/individuals/article/0,,id=179414,00.html

Click here</a> to view the article on the IRS’s Website: Mortgage Workouts Now Tax-Free for Many Homeowners. http://www.irs.gov/irs/article/0,,id=179073,00.html