Short Sale Tax Forgiveness

I heard that Bush signed a bill that releases people that do a short sale from paying taxes on the forgiven debt. Is this true?

1 Answer

The President did approve a bill which became effective in December of 2007.

A homeowner who persuades a lender to permit a ' short sale' would usually receive a 1099 for the amount of the debt that wasn't paid as a result of the sale. This new law permits that homeowner to avoid paying taxes on the amount of forgiven debt, up to 2 million dollars.

However, the law only applies to short sales occurring in 2007 and 2008, and only to the extent that the debt being forgiven was originally incurred in connection with the real estate itself. For example, if you refinanced your home, or obtained a home equity loan, and used the extra money to pay off credit cards, that portion of the forgiven debt is still taxable.