Homeowners in financial difficulty have sometimes been reluctant to negotiate short sales with their mortgage companies because of fear of tax liability for any debt that is forgiven. Since December 2007, however, that is not a concern for most people. Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude certain debt forgiven on their principal residence up to $2 million ($1 million for a married person filing a separate return).
Normally, debt forgiveness results in taxable income. Under the 2007 law, however, homeowners whose mortgage debt was partly or entirely forgiven may be able to claim special tax relief by filling out IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to their federal income tax return.
The debt relief is still reportable on the tax return. For details and advice, consult your tax advisor. Here is a copy of the IRS brochure explaining the issue: Tax Relief for Struggling Homeowners.
If you are facing foreclosure or contemplating turning over the keys to your Flagstaff home with a deed-in-lieu of foreclosure, consider the possibility that your long-term financial future could be brighter with a short sale (if you have to move) or mortgage modification if you would like to keep your home.
Call Team Heitland at RE/MAX Peak Properties for more information: 928-714-0001. | 
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