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We are in California. We are considering doing a short sell

We are in California....
We are in California. We are considering doing a short sell to take advantage of the Mortgage Forgiveness Act of 2007. I notice that it says that it can forgive the taxable income on an original mortgage. However, we refinanced with Wells Fargo a number of years ago. Would this short sale difference still be forgivable under the act for this year? Secondly, we have a equality loan as a 2nd where we took out $20,000. $10,000 has already been paid, so we just owe $10,000 on that loan. Is that forgivable too?
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Answered in 8 minutes by:
9/3/2013
Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 55,806
Experience: 29 years of experience as a tax, real estate, and business attorney.
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Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning. On Page 4 of the instructions to Form 982 (http://www.irs.gov/pub/irs-pdf/f982.pdf), which is the Form to claim forgiveness of debt with the IRS, "qualified acquisition indebtedness" is defined as: "(a) debt incurred or assumed to acquire, construct, reconstruct, or substantially
improve real property that is secured by such debt and (b) debt
resulting from the refinancing of qualified acquisition
indebtedness to the extent the amount of such debt does not
exceed the amount of debt being refinanced. Thus, any forgiveness of debt income from your refinanced loan would be excluded from income. But, any forgiveness of debt income resulting from the $10,000 equity loan which you used for other purposes would not be excluded unless you could satisfy the "insolvency exclusion"...i.e., immediately before the forgiveness, your liabilities were greater than your assets.



This is the part of my job I don't like...when the law is not in favor of my customer. I wish I could tell you the $10,000 was automatically excluded as well, but, I can only provide you information based on the law so that you can act on the best available information to you. ………..I wish I had better news, but can only hope you recognize and understand my predicament and don't shoot the messenger. I'm sorry!



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Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 55,806
Experience: 29 years of experience as a tax, real estate, and business attorney.
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