Federal taxes on short sales forgiven in CA

Foreclosure Real Esate time for actionFederal taxes on short sales are still forgiven. The Mortgage Debt Relief Act of 2007 allowed taxable debt on your federal income tax to be forgiven on a short sale.  Try searching “The Mortgage Debt Forgiveness Act of 2007” on  web sites like Google  ,Yahoo or Bing.   You’ll find the The Mortgage Debt Relief act of 2007 has expired.

Does that mean you will owe money to the IRS on a short sale?

Get the facts. The IRS will not tax you on a short sale in 2014 if you live in California.

Although the Mortgage Debt Relief act has not been extended through congress that doesn’t mean Californians in Los Angeles or Ventura will owe federal income tax when they file their 2014 taxes. Many of my clients on the Westside of Los Angeles want to know if they will be legally liable for “phantom taxon mortgage debt.

Thanks to the continued excellent work by California Senator Barbara Boxer we have an answer directly from the IRS about short sales in 2014.  She wrote the IRS  on August 28, 2013 addressing what impact the expiration of the Mortgage Forgiveness Debt Relief Act would mean for Californians.

“Because the federal Mortgage Forgiveness Debt Relief Act of 2007 exempted any forgiven mortgage debt from being counted as income, homeowners in California and elsewhere who engage in a short sale currently do not have to worry about being hit with a large tax bill on this forgiven debt,” Senator Boxer wrote.

Without a clarification from the federal government that California law protects families from receiving a tax bill in the event of a short sale, once the Mortgage Forgiveness Debt Relief Act expires at the end of this year, Senator Boxer warned that: “…distressed borrowers may face the unfortunate incentive to go to foreclosure rather than seek a short sale in order to avoid a large tax bill.”

The IRS replied with great news for California homeowners.  Families will not face burdensome tax penalties as a result of making a short sale.

See full reply here.

IRS taxesThe California Association of Realtors has projected that even under the recovering housing market there may be as many as 55,000 short sales in California in 2014, with an average debt forgiven of $60,000 per short sale – an amount that could have been taxable without this clarification.

Simply put, the short sale of your home may not be a taxable event on the federal level because the IRS recognizes the debt written off in a short sale in California is a non-recourse debt.

California homeowners who are underwater may be able to short sale their primary home in California in 2014 and not incur both state and federal income tax for completing a short sale on non-recourse loans. Now is the time to sell if you are behind in your mortgage payments.

Is a short sale right for you?  Let’s look at your options from an objective, financial perspective get some solid answers.  I’m here to answer your questions and guide you through this complicated process.

Let’s talk.  310-663-9427

Cindy Marty's signature default advocate and realtor.

Los Angeles Certified Default Advocate specialist 

PS  Always check with your financial and legal advisors.




  1. Larry Waelde says:

    I did not see a reference to 2014 in the IRS’s response to Senator Boxer’s letter. Are we sure it applies to 2014?

  2. Hi Larry,
    I posted an update on the Federal Tax Forgiveness on a Short Sale in California.
    There are links to both IRS replies to Senator Boxer and an analysis from attorney from California attorney
    Steve Beede. Of course verify with your attorney and CPA, but the links in this post overwhelmingly support the IRS and tax forgiveness even though the Debt forgiveness act of 2007 has expired.

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