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Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I have 2 houses in pre-foreclosure, one was my residence, in

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I have 2 houses in pre-foreclosure, one was my residence, in CA, one was a second home in FL. I am trying a short sale on the CA house with a 270,000 forgivness of income (refinance loan with no money taken out, just got a better rate) and a deed-in-lieu for the FL house, with probably about 130,000 in loss (purchase loan). Are there more tax consequences with short sale and deed-in-lieu or with foreclosures? I am insolvent and I do not care about the credit impact at this point, I just want to do the right move tax-wise, then move on.
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello alfi,

Normally when you have a debt that is cancelled, you are liable for tax on the amount of the debt which is forgiven. Due to the current mortgage crisis, Congress passed the Mortgage Foregiveness Debt Relief Act which will allow taxpayers who have a foreclousre or short sale on their home, to exclude the debt from their taxable income. This applies to foreclosures and short sales in the years of 2007, 2008 and 2009 and only applies if it is your primary residence. The exclusion does not apply to a second home or vacation home.

In order to exclude the amount of forgiven debt on a second home, you would either have to relinquish the house through banruptcy, or if you can show that you were insolvent at the time the debt was forgiven, then you may exclude the debt from your taxable income.

Those are the only tax consequences with foreclousres or short sales od deed-in-lieu transactions.

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Thank you.
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