A short sale can also be the best option for a homeowners who are "upside down" on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.
Mortgage Forgiveness Debt Relief Act of 2007There are tax consequences associated with the Short Sale option, some of which have changed under the Mortgage Forgiveness Debt Relief Act of 2007, as amended by P.L. 110-343 (10/3/08). Up to $2 million of qualifying mortgage debt forgiven on the taxpayer's principal residence from January 1 through December 31, 2012 will not be treated as income for the taxpayer, subject to various restrictions. The limit is $1 million for a married person filing separate return. Mortgage debt reduced (forgiven) through estructuring, such as a workout or a short sale, as well as mortgage debt forgiven in connection with a foreclosure, all qualify for the tax exclusion. The Act applies only to principal residences, not vacation homes or investment property. Also the exclusion applies only to "acquisition indebtedness", which is generally defined as debt used to originally build, purchase, or improve a property. Although short sales tend to minimize the difference between what is owed and the proceeds turned over to the lender, thereby minimizing the taxable income potentially accruing to the seller, the possibility remains. Sellers should be advised to consult with tax or legal counsel regarding the impact of the new law and other tax rules on their circumstances.
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