The Mortgage Relief Act does apply to short sales. The Mortgage Relief Act allows the exclusion of income from the discharge of debt on a principal residence through foreclosure and mortgage restructuring or loan modification. The discount on a short sale would be considered a loan modification. This act is effective through 2012. The debt must have been used to buy, build or substantially improve the homeowner's principal residence and be secured by that residence. There is a exclusion limit of two million dollars or one million for a married person filing a separately.
While forgiven debt not associated with a primary residence may not be eligilbe for the Mortgage Relief Act provisions, there may be other ways to exclude the debt forgiveness from income. One possibility in this case is if the person can show they are insolvent. Another option is banckruptcy. Debts discharged in bankruptcy are not taxable.
If you have refinanced only the amount equal to the amount of the mortgage debt prior to refinancing can be excluded.
As always please consult your tax advisor for information specific to your situation. Additionally, here are some links to the IRS website for more information on the Mortgage Relief Act and debt cancellation.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
http://www.irs.gov/pub/irs-pdf/p4681.pdf
http://www.irs.gov/irs/article/0,,id=179073,00.html
Answer Submitted on Thu, May 7 2009
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