The answer is maybe.
President GW Bush signed The Mortgage Debt Relief Act of 2007. The act may be utilized by a homeowner with financial hardship selling his/her primary residence under a Real Estate Short Sale. In essence, under this Act, the seller will not be penalized by taxation of the difference of the amount owed and the amount sold by the Internal Revenue Service.
This act is not automatic and will require the seller to complete IRS form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness. This form along with a Hardship Explanation (in some cases) will be required when submitting your taxes to the IRS.
A direct link to the IRS explanation for The Mortgage Debt Relief Act or 2007: http://www.irs.gov/individuals/article/0,,id=179414,00.html
Detailed examples can be reviewed at this link to IRS Publication 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf
In some cases, real estate investors may also be considered under this act. Again, there are strict qualifications showing hardship and insolvency must be documented.
As always, seek guidance from your CPA or tax preparer on specific tax laws for your state.
Kris Darney
