Does the Mortgage Forgiveness Debt Relief Act apply to short sales?
Hi - I am considering entering into a short sale of my townhouse, but I was wondering if anyone can advise me on if whether or not the Mortgage Forgiveness Debt Relief Act 2007, applies to the difference between what I purchased the townhouse for in 2006 and what it will ultimately sell for (much lower) in 2008? Thank you in advance!
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Yes, the act would apply to you. However, the act applies to the amount of debt forgiven, which is not exactly the same as the purchase 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. However, the house is now only worth $160,000 so that is how much you do a short 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.