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Occasionally, I have been asked…”If foreclosure was avoided by successfully negotiating a short sale, can the difference between the sales price received and the previous mortgage balance be treated as income for tax purposes?”

The Mortgage Debt Relief Act of 2007 specifically addresses this, and was designed to relieve most sellers of the obligation to pay income tax on the amount forgiven, particularly if the property was a primary residence.

If you, or someone you know has recently sold their home as a result of a short sale, I would encourage them to seek legal counsel or consult a tax professional to determine if the short sale in question is protected under this legislation.

Below is a link to the IRS page reflecting FAQ’s on this legislation:

IRS Q & A on the Mortgage Relief Act of 2007