I continue to experience people, real estate practitioners included, that are under the impression that income tax must be paid on forgiven debt if the debt was not used to acquire their primary residence and as further defined pursuant to The Mortgage Forgiveness Debt Relief Act and Debt Cancellation of 2007.

Long before this was enacted there was, and still is, an insolvency exclusion. Basically, if you owe more than you have in assets you are considered insolvent. Your accountant would file a IRS 1099C (“C” for Cancellation) for any 1099 debt that was forgiven. The debt that was forgiven will not be taxed.

Borrowers should verify their insolvency status with their appropriate financial advisor (ie. enrolled accountant, CPA, or tax attorney).

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Comment by Wendy Rulnick on December 31, 2009 at 5:02am
Hi Stephen - Good reminder. Also, I advise anyone who has completed a short sale to have a CPA do their taxes for that year.

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