If you have completed a short sale during 2015 or are contemplating a short sale in 2016, there is good news.
The Mortgage Forgiveness Debt Relief Act recently passed by Congress in December and signed into law by President Obama forgives any cancellation of debt in both 2015 and now in 2016 as a result of a short sale. Thus, if you entered into or will enter into any short sale arrangement wherein the bank forgives the difference between the amount owed and the purchase price, there will be no tax consequences provided that:
- the house has been used as your principal residence for at least two of the previous five year
- The mortgage was used for the purchase of the house or used to make significant improvements to the property; and
- The debt forgiven was for a sum no greater than $2 million dollars.
Thus, for homeowners who have used their property as their primary residence and wish to unload this property (which may be a financial burden to them as well as a nuisance-city violations and potential squatters as examples if the property has already been vacated), this can be quite a blessing. As a result of a short sale, you would not owe any money to the bank, assuming the bank agrees, and you would not owe money to IRS if you satisfy all of the above conditions.
The best advice is to seek legal counsel from an experienced Bronx and Westchester bankruptcy and real estate attorney who will explain the pros and cons of a short sale transaction versus filing a Chapter 7 or Chapter 13 bankruptcy