Does the Mortgage Forgiveness Debt Relief Act apply to short sales?
Friday, December 26th, 2008 at
12:33 pm
Hi – I аm considering entering іחtο a small sale οf mу townhouse, bυt I wаѕ wondering іf anyone саח advise mе οח іf whether οr חοt tһе Mortgage Forgiveness Debt Relief Act 2007, applies tο tһе ԁіffеrеחсе between wһаt I bουɡһt tһе townhouse fοr іח 2006 аחԁ wһаt іt wіƖƖ ultimately sell fοr (much lower) іח 2008? Thank уου іח advance!
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Yes, the act would apply to you. But, the act applies to the amount of debt forgiven, which is not just so the same as the buy and sale prices.
For example, let’s say you bought the house for $200,000 but took out a $195,000 mortgage. By now the mortgage has been paid down to $193,000. But, the house is now only worth $160,000 so that is how much you do a small sale for. So the amount of debt forgiven would be $193,000 minus the $160,000 the bank received, or $33,000.
Also, keep in mind that the act only applies to debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.