Under current law, if a lender forgives all or some portion of a mortgage debt at the time of a short sale or in a foreclosure proceeding (or under any other circumstances), the borrower must recognize the amount of the forgiven debt as taxable income. This is true even if the borrower has received no cash. In addition, the lender is required to provide information to the IRS identifying the borrower and stating the amount of the forgiven debt.
NAR has long-standing policy opposing this harsh rule. In 1999 and in 2000, a relief provision passed the House and Senate in different tax bills, but was never finally enacted. Now, NAR is renewing its efforts to secure this tax relief in light of a possible wave of foreclosures and short sales that could occur in a slowing market or if interest rates were to rise. Legislation has been drafted but not yet introduced in the House to provide this relief.
~~ NAR Washington Report, March 2007
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