Do Short Sales Have Any Tax Implications?

Do you know what will be the result of a person not being able to pay their mortgage? I bet you know, but you don't want another person mentioning that devastating word once again. If you know what I'm talking about, then you clearly know how much damage foreclosure can cause to your life. Because of this, I see people facing it do anything just to avoid it. While avoiding it isn't at all easy, it's doable only if you act as soon as you see red flags. If you notice that paying your mortgage is becoming almost impossible, then you should consider alternatives like short selling the property. While these types of sales also have their negative impact on your credit, they will never affect you as foreclosure will. Many people consider it a life saving option, and that's what you exactly should go after if you are unable to pay your mortgage. In order for us to understand what tax implications short sales could have, we first need to know what short sales are. When home values drop and you find yourself with a mortgage balance that is more than your actual home value, then you should consider short selling the property. If you don't, then you'll be paying more than what the house is really worth. If you can afford your payments, you can continue paying it anyway. However, if you're struggling like everybody else, then you definitely need to consider short selling it and saving yourself the headache. Normally, when your lender approves your sort sale, they will get your left mortgage balance forgiven (which is awesome by the way). However, the IRS considers that forgiven debt as a taxable income. The good news is that in 2007, President George Bush has passed the "Mortgage Forgiveness Debt Relief Act", which indemnifies anyone from paying those taxes until the last day of 2012. It's not actually clear that there will be an extension to that period or not, and that's why you need to decide if you're going to do it on not before the act ends. I've read many articles that claim that there are other solutions that indemnify you from paying the taxes on your forgiven debt after 2012. However, I couldn't be able to confirm any of them, so I think people are just trying to give good guesses, no more and no less. Some of them claim that you can come up with a deal with your lender to reclassify your forgiven debt so it won't be a subject of taxes. I don't thing this is true, as it could put both of you into trouble. Your only way out of paying taxes is the 2007 act, so don't believe everything said about this subject.