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2010: Home was purchased in New Mexico, USA. Negligible down payment. PMI included. Price $152k

2019: Attempted short sale due to hardship (moving to a new city after losing job). Short sale failed with total lack of interest in the property, even at a price point of 66% of original cost. Mortgage company agreed to Deed-in-Lieu, with no further liability.

Is there a tax liability on any portion of the forgiven debt?

For additional details, the Mortgage Debt Relief Act of 2007 appears to exclude as income any debt discharged up to $2 million, applied only to your principal residence. The initial timeframe covered was between 2007 and 2010, but has been extended a 6th (and final?) time to 2019.

  • What jurisdiction are we talking here? Tax rules vary widely and lots of places use $ as currency symbol. – Vicky Jan 8 at 23:44
  • Thanks for the edit, Michael - I think Vicky may still be looking at more specific jurisdiction (the actual state) ... The legal approaches vary widely by state law. – THEAO Jan 9 at 2:48
  • In general, a company that is engaged in lending will supply a 1099-C to report cancellation of debt, which is treated as income and requires tax to be paid. If your lender cancelled some of your debt then you can expect to receive this form. It will probably be spelled out in the documents you signed, so you should look those over to see if there's a specific dollar amount listed (or procedures the company will follow to determine that amount). – Istanari Jan 9 at 15:22
  • @Istanari I'll add a bit to the question about that. I've heard that if mortgages opened between 2007 and 2016 are forgiven, then the borrower will not be taxed on up to $2M of forgiven debt. – Michael Richardson Jan 9 at 15:44
  • @Istanari, It looks I misread something. I think the debt would need to be forgiven between 2007 and 2016 to be covered by that act, though maybe this has been extended to 2019. I'll add it to the question. – Michael Richardson Jan 9 at 15:52
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You would think that the property you're giving them is worth about as much as the debt they're forgiving.... Which essentially means you're selling your house for the amount of the current mortgage.

If that amount is far higher than what you paid for the property (and exceeds $500,000 in gains if it's your primary residence) then you will have to pay capital gains tax on the appreciation.

  • Purchase price was $152k. Remaining balance was around $130k. Attempts at selling it prior to turning it over Deed in Lieu, resulted in no interest, even at an asking price near 100k. – Michael Richardson Jan 10 at 22:04

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