Q: I heard from my agent that if you did a short sale in 2009 even if you have pulled cash out during the life of your loan, a law was passed that you will be exempt from the IRS taxing you. Has this law already been passed or in the process of being passed? For what years does this apply? I’m thinking of doing a short sale and need to know the ramifications. Thank you for your help!
A: First things first: I’m not a certified public accountant (CPA). I’m a real estate broker and a lawyer, but generally speaking, I’m not in attorney mode unless I’m sending out bills for $350/hour.
While I believe in do-it-yourself education as much as the next gal, it sounds to me like you’re at the point where you need to talk with a CPA, enrolled agent (EA) or other tax maven with real estate knowledge to get a professional opinion on your personal situation.
Asking real estate agents for tax advice is a setup for your failure and theirs. I know funds are tight, but you should be able to find a reputable tax preparer who is familiar with the Mortgage Debt Forgiveness Relief Act of 2007 and can answer your questions now in anticipation of them filing your post-short-sale return. Also, the IRS Web site offers some surprisingly straightforward resources on this topic, straight from the source.
This is not the decision to make on your own.
Many people are just now learning that when you owe someone money and that person forgives the debt, the money they lent you might become taxable income. This is coming to the public’s awareness now as people are having debt forgiven by their mortgage servicers via short sales and (very rarely) loan modifications, or more commonly by their credit-card banks through settlements. In fact, this was a major deterrent to homeowners wanting to do a short sale vs. a walkaway at the beginning of the housing crisis. …CONTINUED