This is part 2 in our week long series on short sales.

Yesterday: Short Sale Popularity | Today: Short Sale Tax Issues | Tomorrow: Don’t Walk Away

Note: The following does not constitute tax advice. It is only meant as an overview to give you a starting point to learn more. If you need tax advice pertaining to a short sale or other loss mitigation service, you should consult a tax professional.

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It wasn’t too long ago that a short sale meant a heavy tax burden. A homeowner would have their debt forgiven by the lender (good), but be on the hook for taxes on the thousands of dollars in forgiven debt (bad). The IRS was looking at it as if it was income - kind of hard to accept taxes on phantom income, right? This was hindering borrowers from getting the help they needed as they were simply creating another problem.

Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 was passed and forgiven debt became much less likely to be taxed. The enacted law is not permanent and only creates a three-year window beginning back on January 1, 2007 and ending December 31, 2009. It could potentially be extended if the need is still there.

With this hurdle cleared, a short sale makes a lot more sense for homeowners and the volume of activity has picked up tremendously. If you think you might need a short sale, consult a professional and find out if you qualify.