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Tax Consequences of a “Short Sale” of Real Estate vs. Foreclosure

February 10, 2010

Excellent article from September 16, 2009 by Michael C. Gray, CPA

Miami Short Sales image

  • How are foreclosures (and deeds in lieu of foreclosure) taxed?

  • Tax relief enacted for recourse mortgage on principal residence debt forgiveness.

  • What happens with a “short sale”?

  • Considerations for rental real estate


….excerpts:….

Tax relief enacted for recourse mortgage on principal residence debt forgiveness.

Congress has passed and President Bush has approved H.R. 3648, the “Mortgage Forgiveness Debt Relief Act of 2007.” The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Federal Bailout Legislation H.R. 1424, passed on October 3, 2008, extended this relief through December 31, 2012.

Under the new law, a discharge of “qualified principal residence indebtedness” is excluded from taxable income. “Qualified principal residence indebtedness” is acquisition indebtedness secured by the principal residence of a taxpayer………….. Also, the exclusion only applies to a mortgage secured by the principal residence of the taxpayer.

The election to exclude the income from discharge of principal residence indebtedness is made on Form 982

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