Traditionally, when a home enters a short sale, it would be possible for a homeowner to be held personally liable, by a mortgage lender, for the difference in the sale price of the home and the original loan amount.
Since in 2011, the State of California enacted a provision under the State’s Civil Code of Procedure section 580e, that prohibits a mortgage lender that holds a deed of trust on a homeowner’s principal residence from either claiming a deficiency or obtaining a deficiency judgment from the homeowner once they have agreed to a short sale. For some, this raised the question of whether a lender’s inability to claim deficiency would equate to a taxable “cancellation of indebtedness income” for the homeowner.
U.S. Senator Barbara Boxer has released to the public a letter from the IRS which states that, in fact, California families that walk away from their homes through the process of a short sale will not be obligated to pay a tax penalty for forgiven mortgage debt in light of the federal Mortgage Forgiveness Debt Relief Act expiring at the end of this year.
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