Tax Obligations on the Short Sale of a Florida Property

Ordinarily, relief from indebtedness is taxable as income under the Internal Revenue Code. However, The Mortgage Debt Forgiveness Relief Act of 2007 was passed to benefit certain taxpayers and excludes from income debt forgiven in the years 2007 through 1012. This may encompass up to $2,000,000 in debt forgiveness. One of the ways you may qualify for this tax benefit is through a short sale on your home. There are a variety of factors to consider in determining whether you may benefit from this tax act.

In a short sale, the lender agrees to accept less than the total amount due under the mortgage. However, not all owners or all properties qualify. In general, the following conditions must be met in order to qualify for a short sale:

1. The market value of the property has dropped less than the unpaid balance due to the lender;
2. Mortgage is in or near default status;
3. Seller has fallen on hard times (does not include bad purchase decision, buying another home, moving into apartment etc.) (does include unemployment, divorce, medical emergency, bankruptcy, death); and
4. Seller has no assets (if assets, the lender may deny or may approve it on the condition that seller later pays back the difference).

In addition to the above qualifications, a purchaser must be found and, most importantly, the lender must agree to sell the property in a short sale. It is important to note that the seller does not have to be in default before a lender will consider the short sale. Lenders may consider this course of action if the seller is current, but the value of the property has dropped substantially.

Short sales have practical, legal, and tax ramifications including, but not limited to the following:

1. A short sale will show up on the person's credit report and drop his/her FICO score. Sellers can ask that the lender not report the adverse action to the agencies, but it is up to the lender.
2.The lender could potentially still seek a deficiency decree for the unpaid balance; and/or
3. The IRS could potentially consider the debt forgiveness as income. However, the passing of the Mortgage Forgiveness Debt Relief Act of 2007 should greatly reduce or eliminate this concern.