Sometimes a lender will forgive a portion of your mortgage debt. This typically happens in a “short sale”, which occurs when a property is sold for less than the mortgage balance. This is common in situations where houses either need a lot of repairs and updates or are “underwater” or “upside down” due to high mortgage balances.
The general rule is that forgiven debt is treated as taxable income to the borrower. However, a new law enacted in December 2007 provides relief to troubled borrowers when some portion of mortgage debt is forgiven.
This relief will expire on December 31, 2012, although various groups are lobbying hard to extend this relief.
Under the current law, through December 31, 2012 a borrower is excused from paying tax on forgiven mortgage debt. The debt must be on a principal residence, and the total amount of the outstanding debt can not exceed the original mortgage amount plus the cost of any improvements.
If you have any questions about this law, feel free to call us at 205-390-1050. We buy houses as-is, and we happen to specialize in short sales. We are happy to answer any questions you may have. You may also tell us about your situation at our website, www.WeBuyBham.com.