EDITED ON 4/4/2014
For those hoping to close a short sale in 2014, it looks as if the Mortgage Forgiveness Debt Relief Act will be extended for another year and applied retroactively for 2014.
During the years 2007-2013, the Mortgage Forgiveness Debt Relief Act provided an exception to relieve homeowners who completed a short sale of their primary residence from paying income tax of the forgiven debt. This law has not been extended to cover sales occurring in 2014.
For example, if you owe $400,000 on your mortgage and you complete a short sale for $300,000, you may be responsible for paying the income tax on the $100,000 of forgiven debt.
Please read this IRS article or consult with a tax preparer or CPA for more information.
As always, we offer a free 30 minute bankruptcy consultation by phone to discuss these and other related issues.