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How the Mortgage Forgiveness Debt Relief Act Could Affect Your Short Sale

By Corinne Abbott

As of January 1, 2014, the Mortgage Forgiveness Debt Relief Act will no longer be in effect.  This act had allowed for a deficiency in repayment of a loan that was forgiven by a lending institution to be forgiven for tax purposes.  For example: if an individual borrowed $10,000.00, and after only paying back $2,000.00, defaulted on the loan, and the lender forgave the $8,000.00 difference, the $8,000.00 would typically be considered income because it is an amount that was received that is no longer required to be repaid to the lender.  Under the Mortgage Forgiveness Debt Relief Act, an individual did not have to pay taxes on the $8,000.00 benefit of the forgiven debt, so long the underlying debt was related to the sale of a principal residence for less than what was owed to a mortgage lender and the individual met additional defined criteria.

As of January 1, 2014, this is no longer the case.  Therefore, if an individual is in the process of a short sale, it is possible that when property is sold for less than the outstanding amount due, and the lender approves the forgiveness of the deficiency, the number that the lender essentially “forgave” will be considered taxable income and must be reported on a tax return as income by using Form 982 and attaching it to your tax return for the pertinent year. 


While the Mortgage Forgiveness Debt Relief Act has not been extended to apply in 2014, this does not necessarily mean that it will not be retroactively extended and applied, as it was last year; however, because of the uncertainly of this action, Penner Law Firm wanted to take the opportunity to explain this development to you relative to your short sale transaction. Our law firm does not handle tax law nor do we purport to advise our clients on tax liabilities or individual implications.  We strongly advise that you speak with a certified public accountant or tax attorney to discuss the possible implications to you for the upcoming tax year.