suspended Income Tax on Short Sale extended for 2014
C.A.R. has been working with California Sen. Barbara Boxer to protect distressed homeowners from debt relief income tax associated with a short sale in California. As part of this effort, Sen. Boxer requested the Internal Revenue Service (IRS) to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable income under federal law, given California´s recent non-recourse laws for short sales, which were hard fought victories by C.A.R.
The IRS has clarified in a letter
that California´s troubled homeowners who sell their homes in a short sale are
not subject to federal income tax liability on "phantom income" they
never received. The IRS recognizes that the debt written off in a short
sale does not constitute recourse debt under California law, and thus does not create
so-called "cancellation of debt" income to the underwater home seller
for federal income tax purposes. This clarification rescues tens of
thousands of distressed home sellers from personal liability upon expiration of
the Mortgage Forgiveness Debt Relief Act of 2007 on Dec. 31, 2013.