Short Sellers Won’t Be Taxed on Forgiven Debt — updated 3/25/14 from the California Association of Realtors.
In a short sale, homeowners sell their homes for less than what is owed. If a lender agrees to the sale, the lender is forgiving a certain amount of the loan principle. The IRS and the state Franchise Tax Board have recently issued letters clarifying that California families who have lost their home in a short sale are not subject to either state or federal income tax on the forgiven debt. Before these clarifications, requested by Senator Barbara Boxer and Board of Equalization Member George Runner on behalf of the CALIFORNIA ASSOCIATION OF REALTORS®, it was not entirely clear that homeowners wouldn’t lose their homes and then be faced with a large tax bill as well. Homeowners with questions about taxes and short sales should contact their tax professionals.