What Every Seller Should Know About Cancellation of Debt in a Short Sale

The basic premise behind a short sale is that the seller will negotiate with their lender to sell the house for less than what is owed.  If the lender also agrees to “cancel” or “forgive” the short amount, then there may be a resulting tax liability for that amount.  According to a recent article on RISmedia.com by Linda Goold, tax counsel for the National Association of Realtors,

The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower.


Ok, so the sale is closed, the foreclosure process is stopped, and now the seller is stuck with a huge tax bill?  Well, not necessarily.  According to Goold, there are some exceptions.  For primary residences, the Mortgage Forgiveness Debt Relief Act of 2007 may come into play.  This law is set to expire at the end of 2012, but the National Association of Realtors is lobbying Congress to extend it.  But until then, what happens to the seller when mortgage debt is forgiven by the short sale lender?  Again, let’s defer to tax attorney Goold:

Until January 1, 2013, the homeowner will pay no tax on any forgiven amount.

According to the article, there may also be exceptions for insolvency and bankruptcy.  The key is for the seller to discuss their situation with an attorney or tax professional.

If you’re a borrower and under water on your mortgage, the sooner you act, the better.  Give me a call or send me an email, and I will be happy to provide the information for some Asheville short sale attorneys or tax attorneys for you to call.

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