Legal Question in Tax Law in Illinois

If a person has a short sale, they are taxed on the deficiency amount correct?

If a person does a deed in lieu are they taxed on the deficiency or any amount?

What if a person does nothing and the property goes into foreclosure? Does that person have any tax implications?

Please explain so that I understand the tax responsibilities for each outcome and better understand which one has little to no tax liability.

Asked on 7/27/11, 10:30 am

1 Answer from Attorneys

David Labovitz Labovitz Law Firm, P.A.
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You can research the Mortgage Forgiveness Debt Relief Act of 2007. You can also review the IRS website regarding that topic, which is found here:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Generally, "The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition."

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Answered on 7/28/11, 1:22 pm

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