This Mortgage Debt Relief Act is scheduled to expire on December 31, 2012.
New Hope Realty, Inc
Your question was over 2 years ago and a lot has changed since then. If you sold your house in 2013 through a short sale then you should not receive a 1099C and will not owe income taxes on the debt forgiveness. I would assume the banks will not get this right so if you do in fact receive a 1099C then you should contact a good tax preparer and explain your situation and make sure they know the current law. Please contact me if you aren't sure.
The good news is that the IRS and the Franchise Tax Board have both agreed that any debt forgiven through a short sale is non-taxable in California. It's a little complicated to explain here but if you want more information regarding this you can contact me. Please know that a FORECLOSURE is not treated the same and there could be income tax and debt still owed (on a second mortgage for example).. so it's very important to be sucessful on a short sale and NOT let the house go through foreclosure.
I am a licensed California attorney and I specialize in this area. I'm also a real estate Broker and if I help you with your short sale it costs nothing and you get an attorney on your side. We make the banks and the buyers pay all fees and costs.
Please contact me at 916.442.6400 to discuss.
Ted A. Greene
Law Offices of Ted A. Greene, Inc.
BY LAW THERE IS A BREAK FOR PEOPLE LIKE YOU TO SHORT SALE YOUR HOME UNTIL DEC. 31 OF THIS YEAR.
OUR REALTORS ASSOCIATTION SAID THAT THIS LAW MAY BE WILL BE EXTENDED UNTIL NEXT YEAR
Please see my blog for tips and advice on how a short sale works,
The answer depends on how the Mortgage Forgiveness Debt Relief Act of 2007 applies to your specific short sale situation. You might have no tax liability, but need to confer with a tax professional (CPA/Accountant) to determine that. The website below explains and answers questions concerning the Act:
The Mortgae Debt Relief Act gives certain homeowners tax relief for short sales and foreclosures. The Act is set to expire 12/31/2012. You can google the act and review it. You should seek professional tax and legal advice before proceeding.
1.) The Foreclosure takes care of the Loan and in California, (a Non-Recourse State), the Lender cannot come after you for the DIFFERENCE. (There may be an exception to this if you refinanced and took money out: you may need to do some dilligence on this.)
2.) The IRS will not be after you for the paper profit on the difference; because of the Debt Cancellation Act of 2009. You may still own some STATE taxes, so you should ask your tax preparer.
3.) Property Taxes are still owed by you and probably will follow you.
4.) HOA fees, if any, may follow you too.
Good luck and may God bless