Debt Forgiveness Tax
One biggest question that borrowers often ask is the tax liability on the forgiven debt if the debt was not used to acquire their primary residence. For example, borrowers took an equity line of credit other than loans borrowed to buy their house. Are they liable for income tax on their debt?
The answer is no. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation of 2007 passed to forgiven debt on primary residence, but long before this was enacted there was, and still is, an insolvency exclusion. Basically, if you owe more than you have in assets you are considered insolvent. Your accountant would file a IRS 1099C (“C” for Cancellation) for any 1099 debt that was forgiven.
Aagin, borrowers who want to do short sale because their debt is always HIGHER than their asset, therefore, the debt that was forgiven will not be taxed. I advise anyone who has completed a short sale to have a CPA do their taxes for that year.