What Doesn't The Debt Forgiveness act of 2007 Cover?

I'm pretty sure that if you have done a short sale in your career that you would have run across this issue. Well let me make it plain and simple so that you do not confuse your client or mislead them into believing that they will get away free and clear. I am guilty of this as is almost every agent I spoken with in the past. Better to disclose then explain in the end.

The Debt forgiveness act of 2007 basically says this. If your client that is about to go into foreclosure and the property that they are losing is there primary residence, they qualify to be forgiven of the tax debt that is associated with the loss to the bank. Seems pretty simple, but what is not being talked about is the things it doesn't cover, which I will do. Below is a list of items that will not qualify.

1. 2^nd mortgages: That is right; your second does not qualify for the debt forgiveness. No matter if you did or did not take your second upon buying the home, the act only pertains to the 1^st mortgage on the property.  
2. HELOC: This is the worse one of the bunch. It not only is attached to your property, but is also attached to you personally. The rules are also different with this type of loan. The loan is treated like a credit card and the bank is allowed to pursue you in a deficiency for up to 20 years.
3. Investment Loan: If this property was bought as an investment, there will be tax consequences and even deficiency. There is no way around this unless you go to bankruptcy. The law is to help those who are losing there home not retirement fund.
   
4. Home refinance: If you at sometime along the way of owning your home refinanced and decided to pull out cash to buy toys and do other things that did not improve the value of your home, you will be responsible for the tax consequence associated with the portion of money that you borrowed. The remainder or the original amount will fall into the category of forgiveness.

I am well aware that there are a lot of different interpretations of this law and there may have been some things that I did not cover, but these are the ones I see day in and day out. Please follow this link and read up http://www.irs.gov/individuals/article/0,,id=179414,00.html and if you hear any different you need to question the person giving the news.