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Paul Taliefero
Paul Taliefero, Enrolled Agent
Category: Tax
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Experience:  19 years of experience in income taxes
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A couple sold their home that they lived in for 15 ...

Customer Question

A couple sold their home that they lived in for 15 years(sold 3-17-06)Then they bought another home at that time, and after 6 months the husband moved out.They separated and are proceeding with a divorce. The new home they bought,, the wife lived in for a total of 16 months and the husband for 6 months,, The question is : If they sell the home after 3-17-08 as a "Short Sale" (they are in financial difficulty) will they be excluded from a 1099 tax (on the dept relief) from the mortgagor, based on the 2007 Dept Relief ACT. And doesn't the divorce qualify for an exemption of the 2 out of the last 5 year ruling? I want to make sure that my clients will not be 1099 for the dept reilf,, please respond,,,,thank you
Submitted: 7 years ago.
Category: Tax
Expert:  Paul Taliefero replied 7 years ago.

I would think that the short sale does apply here. This is debt forgiveness that pertains to acquisition debt. You can read a brief synopsis of the law below:

Highlights from Project Vote Smart

The following is Project Vote Smart's highlights for this bill, graciously made available by PVS:

  • - Excludes the debt forgiven on a qualified principal residence from the definition of gross income subject to income tax (Sec. 2).
  • - Reduces the income tax breaks on most gains from the sales of non-primary residences using a formula based on the amount of time that the taxpayer actually lived in the property during the five-year period before the sale (Sec. 5).
  • Congressional Research Service Summary

    The following summary is provided by the Congressional Research Service, which is a nonpartisan government entity that serves Congress and is run by the Library of Congress. The summary is taken from the official website THOMAS.

    12/20/2007--Public Law. (This measure has not been amended since it was passed by the Senate on December 14, 2007. The summary of that version is repeated here.) Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.

    Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums. Sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations. Qualifies a corporation if: (1) 80% or more of the total square footage of the corporation's property is used or available for use by its tenant-stockholders for residential purposes, or (2) 90% of the corporation's expenditures are for the acquisition, construction, management, maintenance, or care of its property for the benefit of the tenant-stockholders. Allows members of a qualified volunteer emergency response organization (i.e., an organization that provides firefighting and emergency medical services) an exclusion from gross income for state and local tax benefits and for certain payments for services. Terminates such exclusion after 2010. Allows certain full-time students who are single parents and their children to live in housing units eligible for the low-income housing tax credit provided that their children are not dependents of another individual (other than a parent of such children). Allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements have been met. Increases the penalty for failure to file a partnership tax return and extends from five to 12 the number of months in which such penalty may be imposed. Limits disclosure of tax return information that includes individual taxpayer identify information. Imposes an additional penalty on S corporations for failure to file required tax returns. Amends the Tax Increase Prevention and Reconciliation Act of 2005 to increase the estimated tax payment due in the third quarter of 2012 for corporations with assets of at least $1 billion.

    Notice the first few paragraphs, particularly the paragraph beginning with "Public Law". I base my opinion on this reading.

    I hope that this helps.

    Paul Taliefero, Enrolled Agent
    Category: Tax
    Satisfied Customers: 239
    Experience: 19 years of experience in income taxes
    Paul Taliefero and 3 other Tax Specialists are ready to help you
    Customer: replied 7 years ago.
    So that my clients will not have to pay taxes on the dept relief,, right? as long as the short sale closes after 3-17-08? Is there any other benefit you know of going with a short sale vs a foreclosure? from a tax position? other than the integrity issue with the lender. We have a sale authorized from the lender already to close on 3-27-08.. Thank you very much for your help

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