Milpitas North San Jose Berryessa Real Estate News

Even if a seller of property is not eligible or only partly eligible for relief under the federal and state cancelation of debt income laws, it is possible she or he could get relief for being "insolvent" under the lax laws.  If, at the time the debt is canceled by the lender, the seller's liabilities are greater than the seller's assets, he or she is "insolvent" under the tax laws.  The amount of tax due for the cancelation of debt could be significantly reduced or eliminated depending on the amount that the liabilities exceed the assets.

One benefit of the insolvency provision of the tax code for sellers is that it applies to situations not covered by the state and federal cancelation of debt income laws described above.  Tax relief available due to insolvency applies regardless of what type of property is involved in the short sale.  For example, it could apply to a residential investment property or a second home as well as someone's primary residence.  It also applies to someone who refinanced a property and took significant cash out for reasons other than home improvements and therefore perhaps would not get as much relief under the 2007 Mortgage Debt Relief Act.

In order for a seller to ascertain whether he or she qualifies as insolvent and, if so, how much relief that will provide, the seller should be advised to seek the advice of a tax professional.  However, the IRS does offer a worksheet that can assist a seller in calculating the extent that he or she is insolvent.