short sale taxes

[John Reid]

My partner came upon a possible short sale deal today totally out of the blue. Found a homeowner who has received an eviction notice after living a house for 4 years. Said his monthly payments went from $500 to $900 a month and that he couldn't make it. I bet he accepted some sort of teaser rate with a 3 year ARM--something like that. He has to be out in less than a week. We explained what a short sale was and that we might be willing to look into talking to his lender to buy the property for less than what he owes. My question concerns tax on the difference between what is owed on the mortgage and what the lender will accept. I did a search on this site and found some information from a couple of years ago. Based on what I read it seems that there was some legislation passed that said that the difference would no longer be taxed which keeps the homeowner from being socked with a nasty surprise. Is this still the case? Those of you who have been doing short sales in the current housing crisis--any information on this? Any good references I could look up on-line? Thanks everyone!

[Bill Walston]

Right you are John. Since this is your seller's primary residence, he will most likely be exempt from paying taxes on the gain thanks to President Bush and the Mortgage Debt Relief Act of 2007. According to the IRS website: "The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012."

You can find more info here: http://www.irs.gov/individuals/article/0,,id=179414,00.html

Hope this helps!