Are there tax implications in doing a Short Sale?
Yes but you can usually get the IRS to waive them. When the bank forgives the balance of your mortgage, the IRS considers this a gain to you. As such you may be required to pay income or capital gains tax depending on how long you owned the property. The Mortgage Debt Relief Act of 2007 excludes up to $2 million in income from forgiven debt on a principal residence up through December 31st of 2009. However, even with an investment property, the IRS has a Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness. (Click to download) and you should speak to your accountant because the IRS will often grant a hardship waiver even on a property that is not a principle residence. (Note: we are not accountants and do not provide accounting advice. All information contained herein should be verified with a certified accountant)