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Short Sale And Your Taxes: The Mortgage Forgiveness Debt Relief Act / Mortgage Cancellation Relief Act
By Dan Handle, 24 Jun 09:56
The House version of the bill (H.R. 3648), titled the Mortgage Forgiveness Debt Relief Act of 2007 was amended by the Senate on December 19th 2007.
The Mortgage Forgiveness Debt Relief Act removes the tax liability associated with a “short sale”.
For example if a Homeowner owes $700,000 on the first mortgage of his/her personal residence and the lender approves a “short sale” that will net the lender $500,000, the lender writes off $200,000. The lender is required to report that $200,000 of debt relief to the IRS.
Depending on seller’s tax bracket, the taxes owed on that $200,000 in forgiven debt could run into the thousands (potentially many thousands). This new bill alleviates the taxes on that debt relief. The maximum amount of “forgiven debt” is $2,000,000 for a married couple.
Section 121 of the IRS Code defines “principal residence” as: “. . . during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. “
In short, if you lived in a home you own for 2 of the past 5 years (from the date of sale), it is considered a principle residence.
The bill also states that this section shall apply to discharges of indebtedness on or after January 1, 2007.
Disclaimer: Please consult a tax professional to verify all the above. This article is not intended to be legal advice.
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Tags: short sale short pay tax debt relief