People who cashed out refinances, or had part of their mortgage debt forgiven when they sold their homes through short sales, will probably owe the IRS a big payback.
In 2007, Congress passed the Mortgage Forgiveness Debt Act, but that doesn’t let everyone off the hook.
Here are exceptions to the rule:
• Anyone who did a cash-out refinance and spent the money on something not housing related, then got in trouble and lost their home to a foreclosure or short sale, will owe the IRS as if the money from the refinance were earned income.
• The IRS will forgive tax liability only on money from home-equity loans that was spent to improve the property.
• Anyone who lost a vacation home or investment property to foreclosure or short sale will owe Uncle Sam.
• Multi-million dollar homes — lost or sold — are always subject to tax.
Source: CNNMoney.com, Les Christie (04/08/2010)
If you planning to do a short sale, be sure to use an agent that is knowledgeable and will be open and honest about all the pros and cons involved.