An Important Update on Mortgage Debt Forgiveness



An Important Update on Mortgage Debt Forgiveness

An Important Update on Mortgage Debt Forgiveness

The IRS has clarified in a letter that California’s troubled homeowners who sell their homes in a short sale are not subject to federal income tax liability on “phantom income” they never received.  The IRS recognizes that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes.  This clarification rescues tens of thousands of distressed home sellers from personal liability upon expiration of the Mortgage Forgiveness Debt Relief Act of 2007 on Dec. 31, 2013. 

C.A.R. is seeking a similar ruling from the California Franchise Tax Board (FTB), which has been awaiting the IRS action; we anticipate the FTB will act promptly.  Short sales may raise other tax issues and, as always, you should advise your clients to speak with their tax professional regarding the tax consequences of a short sale.

Randy E. Guth                                                  
1450 University Ave. Suite F2 Riverside, CA 92507 Ph 951-300-1010 Fax 951-300-1021 Cell 951-347-9773 Rguth@exitgmw.com

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