Many people are under the impression that due to the Mortgage Debt Relief Act they will have no tax liability when short selling a residential property. This is not always the case. The Mortgage Debt Relief Act applies to individuals selling their primary residence and only applies to principle residence indebtness. This act also expired on 12/31/2012. Individuals who short sell a home will receive a 1099-C from the bank. This 1099-C is reproted to the federal and state returns. If the property in questions is an individual’ primary residence, and the entire amount owing is qualified principle residence indebtness then there will be no tax for federal and state purposes .
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