I'm considering a short sale on my housein California as I am under water $250,000. I understand the relief on that $250,000 deficiency is taxable unless my loan was a purchase loan, which it isn't. It was a refi , where there was no money taken out for improvements, as was the case of my re-fi before it. So I understand the amount forgiven is taxable income, Is that right?
Even so, Can my lender sign a document that relieves me for tax consequences on the debt relief?
Thank You

Yes, it IS taxable income.

No, you are NOT eligible for any relief to the tax liability.

No, the loan company CANNOT release you from the tax consequences.

If it is your primary residence you may be eligible for relief under the Mortgage Forgiveness Debt Relief Act for up to $2 Million.

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Thank you for your responses.Yes, I've read that the mortgage relief act could possibly help my situation, but upon further investigation online. I did find this IRS link about the mortgage Forgiveness Act.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

And from that,I did find this question and answer. (below)

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the" principal balance of the old mortgage, immediately before the refinancing," would have qualified. For more information, including an example, see Publication 4681
This paragraph is from this:

In response, I did read Publication 4681, and have yet to find tax relief. I'm not insolvent and I'm not sure I qualify under Qualified Principle Residence Indebtednes, nor have I read anything yet as to whether the " balance of the old mortgage, immediately before refinancing" would have qualified" Am I to assume the same criteria is applied to the old mortgage? That is, it must have cash taken out for home improvements?

SpikeRivet:

I STRONGLY recommend you find a local tax professional with experience dealing with this specific tax issue (should not be a problem finding someone in California) and have a face-to-face meeting to examine ALL of your options.

The complexity of this issue demands a face-to-face meeting and review of ALL of your financial details to determine the correct course of action.

I'm sorry, this is the link from the IRS.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

I'm sorry I didn't see your post. I think you're right and I will. I did talk to a cpa from California and he told me the forgiveness was not a problem but the capital gains would be. From what I've determined he's got it totally backwards.

Ask the CPA to detail his experience in submitting tax returns requesting relief under The Mortgage Forgiveness Debt Relief Act and Debt Cancellation. The CPA may not have the required experience.

If not, find someone who does.

That sounds like a sound plan. Thank You

Glad to help!

Quote:

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Originally Posted by spikerivet

I'm considering a short sale on my housein California as I am under water $250,000. I understand the relief on that $250,000 deficiency is taxable unless my loan was a purchase loan, which it isn't. It was a refi , where there was no money taken out for improvements, as was the case of my re-fi before it. So I understand the amount forgiven is taxable income, Is that right?
Even so, Can my lender sign a document that relieves me for tax consequences on the debt relief?
Thank You

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I have the same problem in Florida the bank sent me a cancellation of debt for 116K plus short sale of a rental property . My question is what is I can report as cost on a capital gain/loss schedule D the taxes , interest and down payment that I paid on that property in previous years?

Like Spike, I am going to recommend that you find a local, competent tax professional and bring your return and other doucments to him for analysis.

Isavana:

First check on if were insolvent just prior to the short sale. (List all your assets and liabilities including the rental property). If you were insolvent, you could exclude the cancellation of debt to that extent. Also there are other provisions with which you could eliminate the entire COD.

If you need professional help, do contact me.

Indian CPA
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