Truth be told... most homeowners who qualify for preforeclosure short sale relief (legitimate and life altering financial hardship) do not have much, if any, tax liability resulting from forgiven debt.

The bill's passage would have little impact on them, but would benefit those homeowners who participate in preforeclosure short who have good income, and other assets.

David from what I hear, the IRS has no hardship letter or the heart for a hardship -- and it is not that easy to get away from the tax.  But if you are in hardhip in the lender's eyesight, I would think the same should apply to the IRS... I mean how can you be it to one institution and not to another?   Where I can see someone getting caught is that while during the missed payments, default and foreclosure they lost their job and got far behind on all their bills -- they later found another job that pays pretty good and therefore, they are not in hardship anymore.  I think the IRS will not be easy on them. Usually bills are set up for those that don't really get the value from them anyway. 

But I will say this foreclosure epademic is not good at all and any help from anywhere will help more than it  will hurt.

The example is that if you sell your home and even if you have to sell it at a much lower price, you get the $250,000 / $500,000 exempt why would they NOT give an exempt credit to people that have fallen into bad times and have had to walk away from their home - and most of those people will end up either homeless or in a bad way due to the foreclosure.  Of course, we all know that there are others that simply mismanaged their money, but most have real hardships.

Losing your home is always a hardship.

"why would they NOT give an exempt credit to people that have fallen into bad times and have had to walk away from their home"  

The IRS already does provide for exemption from 'phantom income' taxes arising from forgiven debt to those who have fallen onto hard times... 

"and it is not that easy to get away from the tax"

In addition to choreographing preforeclosure short sales for the last 10 years, our np's CPA provides tax counseling, specifically in debt forgiveness matters.  Trust me, as a 25 year practitioner when I tell you that the IRS test for insolvency is straightforward, and the overwhelming majority of hardship shorts result in little or no tax liability.

David - I believe you.  My reasoning for the post was to offer relief for agents that advise their sellers about the possibility of this tax (because we are supposed to disclose this) We can't tell them that the majority of hardship shorts result in little or no tax liability -- just in case they are the ones that do get taxed.  They will come right back and quote us on the words we spoke.  I would hope that the IRS is not out to make it worst on the people that suffer, so your comment is good news all the way around.

Thank you for your comment. 

Rosemary - Great post on a timely topic.  In the most recent short sale I handled unfortunately the Sellers filed for Divorce and Bankruptcy the day after close of escrow.  They avoided taxes - but obviously the upheaval to their life in general was huge.

Tony unfortunately there will alot of situations ending like yours with all the home losing going on.  Lots of families will be broken up.  I hope someone fix the problem soon.

Rosemary - Nice article on the topic - only I thought it was congress that passed the bill and it is now waiting for the Senate to come back from summer break and pass the bill.

Now Have a Blessed Day,

John Occhi, Hemet CA REALTOR®
Mission Grove Realty

I believe you are right.  I wrote this a while back and in a hurry to go do real estating.... I later read another article on this subject and thought one of us is wrong. I will correct after verification, but I think you are correct.

John - OK I updated my post.  It went through the House of Representatives and now is waiting on Congress to return on September 4, 2007 from their "well deserved" vacation.  Thanks for the correction. And thanks for dropping by.