I just had the conversation with a seller today about looking on the bright side of the mortgage forgiveness act expiration and thought it would be a good topic for a blog post. 
With the expiration of the Mortgage Forgiveness Act there has been some understandable panic. Misunderstandings (and even misreported information) around the expiration of the Act have caused unneeded stress. So if you are feeling the need to panic – don’t! At least not yet. Take a deep breath, read this post and always refer to your tax consultant for specifics in your case.
Here is a FACT: The IRS has long recognized an insolvency exclusion on unforgiven debt. Insolvency is defined as the difference between all of your assets (house, car, investments, retirement accounts) and all of your liabilities (mortgage, car payment, debts, credit card payment, etc.), and if that is less than zero you are insolvent and you are entitled to the exception. That is good news! The link above will start you out in the “Canceled Debts” section but just read on until you find the section on insolvency and the included worksheet. Again, your tax consultant can help with this.
In 2007 congress added another exclusion under the act for the qualified personal principal residence (The Mortgage Forgiveness Act). This is what expired in December 2013 and what the media freaked everyone out about (gotta love the media, right?).
So why do I think this “expired Mortgage Forgiveness Act” may not be a big deal for you? Simply because the insolvency exclusion has continued to remain in place. So if you are selling short you are probably insolvent which means you have little to no tax liabilities and really didn’t “have to have” the Mortgage Forgiveness Act. .
More reading material: IRS Publication 4681, page 4, 3rd column
As always, feel free to call me anytime to talk about anything related to real estate. I am happy to help in any way I can!
Bottom Line: You’re Not Too Late To Do Something About Getting Out Of An Upside Down Mortgage!
-Lyndsay
