TAX RELIEF FOR SHORT SALES
As many of you may know, one of the big impediments to short sales was the fact that the taxpayer would be charged with ordinary income for any debt which was forgiven by a lender in the short sale. So the taxpayer might get out from under the property but was left with a big income tax bill. The long awaited tax relief from this provision has now been signed into law. On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which greatly reduces the negative tax implications of a short sale if the debt being forgiven meets certain criteria. Under this new law, there is a permanent exclusion for discharges of debt of up to $2,000,000 (which was forgiven by the lender after January 1, 2007) if the debt was secured by a principal residence and was incurred in the acquisition, construction or substantial improvement of the principal residence. Instead of including the amount forgiven as income, the basis of the individual's principal residence will be reduced by the amount excluded under the bill. This new law does not change existing law as it relates to forgiveness of a debt which was used for purposes other than acquisition, construction or improvement. So lines of credit and home equity loans which were used for paying off credit cards, buying second homes, boats, etc. will still be treated as ordinary income if forgiven by the lender.
Info compliments of Placer Title Company