Short Sales, Foreclosures and Income Taxes: a Summary

Short Sales, Foreclosures and Income Taxes: a Summary If a taxpayer owes mortgaged debt to a lender and the lender cancels or forgives that debt in a short sale or foreclosure, in general the cancelled debt is taxable. However, the canceled amount may be excluded from taxation under the Mortgage Forgiveness Debt Relief Act of 2007. In general, this law allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2,000,000 of forgiven debt is eligible for this exclusion ($1,000,000 if married filing separately).