Good news for short sales that did not get closed by 12/31/2012:
The Mortgage Forgiveness Debt Relief Act of 2007 has been extended (again) through 12/31/2013, as part of the Fiscal Cliff legislation.
This Act allows qualifying taxpayers to exclude taxable income from the discharge of debt (through a short sale, foreclosure, or restructure or a mortgage) on their principal residence.
The debt must have been used to buy, build, or substantially improve the principal residence. Refinance debt may qualify unless it was used to pay off credit card debt. Debt on second homes, rental property, and investment property does not qualify.
Certain taxpayers may be able to exclude cancelled debt as taxable income if they have filed bankruptcy or provided proof of insolvency.
The taxpayer will still receive a 1099-C showing the amount of forgiven debt, and the taxpayer will need to file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to exclude the amount on the 1099-C from taxable income.
Thanks to Neel & Robinson for this helpful tip!
