Understand the tax implications of short sales before signing an agreement

Some homeowners struggling under the financial burden of their mortgage may consider a short sale to get out from under debt. This has a been a viable option for millions of Americans, but financial professionals urge consumers to understand the tax implications of this action.

Short sales allow homeowners who owe more on their mortgage than the property is worth to sell their home below market value to pay off their lender. Under this transaction, the lender agrees to forgive the remainder of their balance. But under current tax laws, the federal government views any forgiven debt as taxable income, resulting in a larger-than-expected tax bill for consumers who short sell their homes.

However, the Mortgage Debt Relief Act of 2007 provides some assistance to homeowners. Under the legislation, eligible short-sale sellers may not be subject to taxes on forgiven debt of up to $2 million on the sale of a primary residence only. Married couples filing separately may be exempt from taxes of up to $1 million each.

Distressed individuals considering short sales may want to consult their tax preparer to determine how they may be affected during filing season, allowing them to make a more informed decision.


Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.