Question: I’ve heard  that I will have to pay taxes on the difference between what I owe and what I can sell my house for in a short sale.  Is that true?

Answer:  I am neither an accountant nor a lawyer but I will share what I have learned from various sources. 

1. The Mortgage Forgiveness Debt Relief Act of 2007 relieves the homeowner of any potential liability in regards to the shortfall that may occur in a short sale. However, for the most part, this only applies to foreclosures on primary residences, and is set to expire soon.

2. All is not lost on the investment property or second home if the borrower can prove insolvency. The threshold for proving insolvency is much lower than qualifying for bankruptcy. Basically if one’s debts verifiably exceeds their assets they may be absolved with the use of the IRS Form 982.