From the Internal Revenue Service’s point of view, if someone forgives a debt you owe them, the canceled amount may be taxable income.
In December 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. Under regular circumstances, when a lender forgives all or part of a borrower’s debt, the forgiven amount is considered income and the borrower is taxed on that amount. This law offers relief to the homeowner in that it extends relief for three years, covering debts discharged through 2012.
This law is extremely important to those considering a short sale. Amendments have been made to remove tax liability and allow the borrower and lender to work together to find a common and beneficial solution for both parties. The Act’s debt relief provisions apply only to primary residences and the exclusion is limited to $2 million per year.
Visit the IRS web site for more details on the Mortgage Forgiveness Debt Relief Act.
