Northern Virginia Cash-Out Refi's May Not Be Eligible for Mortgage Debt Relied in a Short Sale.  If you are a short sale seller that has taken cash out in a refi, you need to consult a tax professional immediately.  If your short sale is approved and your mortgage holder sends a 1099 to the IRS, you may have to pay taxes on the cash-out portion of your refinance.

On the IRS website, where the Mortgage Debt Relief Act is defined, it clearly states that:

The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

When refinances are specifically addressed, the answer is:

Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

The implication being that if you did a cash-out refinance, and used the cash to buy a car, boat, or travel around the world, that cash-out amount would be exempt from the Mortgage Debt Relief Act.

The Mortgage Debt Relief Act also only applies to principal residences.  Investors will have to look to their tax professional for advice on how to handle a 1099 in a short sale or foreclosure of investment property.

ANY ONE FACING A SHORT SALE NEEDS TO CONSULT WITH A TAX PROFESSIONAL.