Do I Have To Pay Taxes on a Real Estate Short Sale

Posted on May 24, 2008
Filed Under Short Sales | 1 Comment

Do I Have to Pay Taxes on a Real Estate Short Sale? This is a much asked question in the real estate industry. Due to the tremendous record number of short sales in the US thousands of homeowners want to know if they have to pay taxes on a short sale.

This information about taxation on a real estate short sale is informational and not intented as tax advice. You should consult your tax advisor for real estate short sale tax questions.

The Mortgage Debt Relief Act of 2007 was signed into law by President Bush. The following is a quote from President Bush about this new law: “When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes. So I’m working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt.” ? President George W. Bush, 9/1/2007

Prior to this law passing a homeowner selling a home as a short sale whose home had fallen in value below the amount of the current mortgages would face a tax bill by the IRS on the forgive debt. Ouch!

This new law regarding taxes on forgiven debt of a home mortgages is for mortgages originated on or after January 1st, 2007 and only applies to the primary residence – purchase, construction or significant improvement.

While we are happy for The Mortgage Debt Relief Act of 2007 we can be sure there are thousands of homeowners who wished it would be retroactive to prior years.

Here is how the law reads at the website, source is

Major provisions of the new law:

Permanent exclusion from gross income of discharged home mortgage indebtedness.

Long-term extension of the deduction for private mortgage insurance.

Modification of the qualification tests for cooperative housing corporations.

Modification of exclusion of gain on sale of a principal residence.

Learn more about Debt Relief on Taxes due to a Short Sale


One Response to “Do I Have To Pay Taxes on a Real Estate Short Sale”

  1. Lura Dillenburg on July 10th, 2010 10:57 pm

    I am now confident the peak in Canadian housing has finally set in. The real estate industry tries to convince everyone it’s business as usual and homes are affordable because rates are low. High-end home prices will remain relatively steady for a brief while longer.

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