No Tax on Foreclosures or Short Sales? True or False?

Many homeowners are concerned and confused about everything within the mortgage industry these days. But at least there is a little relief concerning the tax liability on the forgiven debt in a short sale or foreclosure. There is tax relief available to struggling homeowners.

H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007" will ease some of that stress and worry about paying income tax on that amount of forgiven debt. But there are a few guidelines and qualifications within this "Act".

• APPLIES ONLY TO FEDERAL TAX OBLIGATION!!!
• You may still owe your State Income Tax.
• It must be your primary/principal residence. Primary/principal residence means: go back 5 years from the date of the sale/foreclosure and if you lived in the home for a total of 2 years, it qualifies as a primary residence.
• Cannot be a rental property or business/investment property.
• It applies to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
• It applies to debt that was reduced by mortgage restructuring
• Debt used to refinance your home can qualify, IF the principal balance of your old mortgage would have qualified to begin with, before you refinanced.
• Applies only to debt forgiven in the year 2007 through the year 2009.
• You have to report the amount of the forgiven debt on tax Form 982 and submit it with your tax return.
• You cannot use this "relief" for debt forgiven on a second home, or on credit cards, or on car loans.
• The amount of the canceled debt cannot exceed $2 million. Or $1 million if filing separately.

There is another important provision to pay attention to in the Mortgage Forgiveness Debt Relief Act. It is the "insolvency" exclusion. You may still be able to qualify for the tax exclusion with this.

• You are "insolvent" when your total liabilities exceed your total assets.
• Forgiven debt that was discharged in a Title 11 Bankruptcy may qualify for exclusion also.

There are more insolvency qualifications that are listed on the tax Form 982. Be sure to research all your options.

And be sure to remember:

1. NOT ALL STATES HAVE CONFORMED TO THIS "ACT" YET! Check whether or not your state has conformed.
2. Always get tax advice from a qualified tax advisor.