Real Estate Mortgage Short Sale Process Legal Implications

Consult an attorney/accountant for longer-term effects before completing a Real Estate Short Sale. Although we are experienced short sale experts, we are not qualified to give legal or tax help associated with the process as you attempt to save your house from foreclosure .

The IRS formerly considered debt forgiveness as income. However, legislation (October 2007) has reversed that rule. Additionally, ARS 33-729 and ARS 33-814 protect a homeowner from a mortgage lender deficiency if:

  • the property is less than 2.5 acres
  • it is a 1-2 unit dwelling (dwelling means someone lived in the property)
  • “purchase money” was used in the mortgage process
  • the property is sold at the trustee’s sale

Additionally, the IRS will not collect the ‘forgiveness’ tax if ANY condition applies during the year the forgiveness occurred (The Mortgage Forgiveness Debt Relief Act and Debt Cancellation 2007):

  • it was the homeowner’s primary residence for two of the last five years and “purchase money” was used
  • the homeowner can prove insolvency (more debt than assets)
  • the homeowner completed bankruptcy (and debt was discharged)

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