"Mortgage Forgiveness Debt Relief Act"

Here is a quick update regarding the "new rules" from the IRS for taxes and penalties after a Short Sale. This is the "Mortgage Forgiveness Debt Relief Act", effective December 20th, 2007.

In all cases the Seller will receive a Form 1099-C at the end of the year from the lender, showing the amount of debt written-off during a Short Sale or Foreclosure. That amount is reported to the IRS and will be considered taxable income to the Seller.
However:
1) If the property was their primary residence, the Seller can apply for an exemption (relief) from the tax up to 2 Million. (1 Million for a married person filing a separate return). To be eligible for this exemptioin the Seller must file a Revised 982 Form. This exemption ONLY applies to the tax years 2007,2008, and 2009.
2) If this was a rental property, second home, home based or commercial business, the Seller is liable for the tax unless:
a) the Seller files bankruptcy, or
b) the Seller can prove insolvency (more liabilities than total assets at the time of the sale).
and files the Revised 982 Form to apply for the exemption for tax years 2007 - 2009.
The Revised 982 Form is not a standard form in most tax preparation software, so the seller should pay special attention to ensure it is included in their tax returns. This simple form could help Short Sale Sellers avoid a tax lien and save thousands of dollars.
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