Borrowers are often concerned about the tax consequences of a short sale. This is because, up until fairly recently, mortgage debt on a primary residence that was forgiven from a Short Sale or Foreclosure could be counted as “taxable income” by the IRS.
That all changed at the end of 2007, when the Mortgage Forgiveness Debt Relief Act was signed into law. Effective from January 1, 2007 through December 31, 2009 (subsequently amended to continue through 2013), any forgiven or “cancelled” primary mortgage debt from a principal residence, or debt used to improve the residence, will not be taxable. The limits are up to $2,000,000 for married couples filing jointly, or $1,000,000 if filing separately.
Please note that tax law is very tricky. It is vital that any borrower considering a short sale discuss their personal situation and any concerns about their mortgage indebtedness with a qualified CPA or attorney.
If you would like to learn more, the following links may be helpful: