One of the most frequent questions we are asked regarding short sale transactions involves the tax consequences of these situations. There is a tremendous amount of mis-leading and “completely false” information floating around on the internet. Of course as a Realtor I am not licensed to give tax advice, and thus I will strongly suggest that you always consult with a licensed CPA or attorney when dealing with these matters; however, please click the attached link to view the Mortgage Forgiveness Debt Relief Act as it appears on the IRS web site (click link) http://www.irs.gov/individuals/article/0,,id=179414,00.html
In summary, the Mortgage Forgiveness Debt Relief Act states that if you borrow money (up to $2 million dollars) from a bank or a commercial lender and the lender cancels or forgives the debt (a.k.a. Short Sale) then you are not responsible for paying taxes on the forgiven amount. This applies only to primary residences, NOT investment properties.
After a short sale has been approved, and escrow has closed, your bank is required by law to provide the IRS with a Form 1099-C. The 1099-C will show the IRS the amount of debt which was cancelled or forgiven. Before December 20, 2007, (this is the date which the Mortgage Forgiveness Debt Relief was enacted) the amount of forgiven debt was considered to be taxable income. This is no longer the case for primary residences.
The Mortgage Forgiveness and Debt Relief Act applies to debt forgiven in calendar years 2007 through 2012. It has not yet been determined if the Mortgage Forgiveness Act will be extended past 2012, however, the Government does not appear to be in sync with the extent of the foreclosure crisis. On September 15, 2009, Federal Reserve Chief Ben Bernanke said that “the recession was likely over.” This statement was made despite the fact that the majority of residential mortgages are scheduled to adjust in 2011. The number of foreclosures in 2008 and 2009 due to adjusting ARM’s is just the tip of the iceburg. Most banks and industry insiders agree that based upon the increasing number of monthly loan defaults, combined with the number of Option-ARM loans scheduled to adjust in 2010, and 2011, the worst may be yet to come. (see figure 1.7)
The Myers Team with Century 21 MoneyWorld has closed more short sale transactions than any Realtor or Broker in Nevada. For additional information, please visit www.NevadaShortSaleInfo.com