Short Sales – What you need to know about mortgage debt forgiveness.

With the value of properties dropping over the last couple of years many people have been forced to sell their homes for less than they owe on the property.  When this happens, the bank can require that the people who owe the mortgage still owe the outstanding balance or it can forgive the outstanding amount, called mortgage debt forgiveness.  While having the bank forgive the outstanding mortgage balance sounds great, there are other considerations that you need to think about first.

Generally, any debt that has been forgiven is considered taxable income by the IRS.  However, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which forgives taxes on the amount of mortgage forgiveness if a few conditions are met.  First, the property sold on which mortgage forgiveness was given must have been the taxpayers primary residence.  Second, if the debt forgiven was for a refinance, the income from the debt forgiveness can only be forgiven if the refinance was used to improve or repair the primary residence.  Thus, if you refinanced and used the money to pay off credit cards or other debt, the debt forgiven would still be taxable as income for IRS purposes.