If you are a homeowner involved in a short sale and your lender has agreed to "forgive" any unpaid balance due on your mortgage, you will be pleased to note that you will not be taxed on the amount of "debt forgiveness" thanks to the new Mortgage Forgiveness Debt Relief Act of 2007 that was signed into law on 12/20/07. This act amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred to acquire a principal residence. The act limits to $2 million the excludable amount of such indebtedness, reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income and sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent.
The act also extends through 2010 the tax deduction for mortgage insurance premiums. For more information or for a copy of the Mortgage Forgiveness Debt Relief Act of 2007, click
HERE.