Right now most borrowers and sellers seem to qualify for this relief, exempting the "income" they earn on the short sale debt forgiveness as taxable income.
This is currently set to expired at the end of this year, 2012.
The homeowner would get 1099 the same through a foreclosure than a short sale, more than likely the 1099 would be for a higher amount since the banks get less money for properties as a foreclosure than a short sale.
This is from the IRS link...The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Hopefully it will be extended andf if it doesn't we will see a sharp decline on strategic defaults but the people that have real hardships have other ways around paying taxes that they can discuss with their CPAs, like insolvency.
Has anyone heard anything new about this? I don't think it's going to be extended because it was a Bush Era tax cut and the Obama administration has said they are doing away with many tax breaks. I would hate to see people who are all ready struggling be pushed further into their hole of debt.
Actually capital gains and cancellation of debt are two separate things. Most people who truly have a hardship can probably claim insolvency but that is a CPA question that every seller should ask prior to making a decision as to what to do with their home. And one thing that we should all remind sellers is that whether they do a short sale or let it go to foreclosure they will get a 1099-C at the end, and in the case of a foreclosure it would probably be for more since most properties sell for less as an RE, plus depending on the state with a foreclosure they might still need to worry about the deficiency.