The following is from the Wall Street Journal's (WSJ) RE website. It may apply to you or it could apply to the people you are negotiating with when they are motivated to sell at a loss (short sales mostly).

Here is the summary. The link gets you to the WSJ website. Nothing else there on this specific topic. Still, it might be important to share the link with motivated sellers so they know you are not just making this stuff up. Use the WSJ to establish creditability.

Note the reference to the IRS form that applies.

John Corey


http://www.realestatejournal.com/buysell/taxesandinsurance/20080318-herman.html

By Tom Herman From The Wall Street Journal Online
New Tax Breaks To Aid Some Homeowners

Normally, if a lender forgives your debt, that's considered taxable income to you (although there are several exceptions to this general rule). Under a law enacted Dec. 20, known as the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude from gross income debt that was forgiven on their principal residence for "qualified" mortgage debt up to $2 million (or $1 million for a married person filing a separate return), Mr. Witt says.

This exclusion applies to debt forgiven during 2007, 2008 or 2009. There are many complex details. For more information, see IRS Form 982 and the instructions.

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