Mortgage debt relief

[tmike]

I have not dealt with this yet, but would I be correct to say that debt forgiveness under the short sale of as house be forgiven under the debt relief act of 2007. The entire mortgage is acquisition debt. -Mike-

[ILLMAS]

I have not dealt with this yet, but would I be correct to say that debt forgiveness under the short sale of as house be forgiven under the debt relief act of 2007. The entire mortgage is acquisition debt. -Mike-

Yes, however there are restrictions, I guess this the most important one: "The loan also must have been taken out to buy or build a primary residence, not a second or vacation home. If debt is forgiven on those additional properties, the owner will owe cancellation of debt income as usual." Many people think their investment properties fall under this act, but that not the case, it's only for a primary residence. Here is an example I like to give to my clients that call me:

For example, let's say you bought the house for $200,000 but took out a $195,000 mortgage. By now the mortgage has been paid down to $193,000. However, the house is now only worth $160,000 so that is how much you do a short sale for. So the amount of debt forgiven would be $193,000 minus the $160,000 the bank received, or $33,000

[tmike]

Thank you MAS-Mike-

[jainen]

>>it's only for a primary residence<<

This law only applies to recourse loans. Many mortgages used to purchase a primary residence are non-recourse in their terms or by state law. Furthermore, any excluded debt relief reduces the basis of the property. This may cause the taxpayer to realize capital gain, especially if the property had been depreciated as a rental or office in home.