The Mortgage Forgiveness Debt Relief Act is set to expire this year. IMPORTANT NEWS for anyone considering a short sale.

In a short sale it is always the homeowners goal to get the “shorted” amount forgiven by the lender. For example – if the mortgage on a home is $400,000 and the home sells for $250,000, there was a shortage of $150,000 to the lender. Under normal circumstances the homeowner would receive a 1099 for this amount at the end of the year as this is viewed as taxable “income” by Uncle Sam. As many homeowners have significant negative equity – having to pay taxes on this “income” could result in a great amount of tax debt.

The Mortgage Debt Relief Act of 2007 was enacted to allow taxpayers to exclude income from the discharge of debt on their principal residence.

*The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012*

While I personally believe the act will be extended, this decision had not yet been made and there is a possibility the act will expire. Any homeowner considering a short sale needs to be aware of the proposed expiration of the act and needs to consider the tax repercussions of a short sale without this tax relief.  In order to qualify for the act (currently) your short sale would have to CLOSE by the end of 2012. As short sales can take many months to close, in order to make sure your home will close by 2012 you would ideally list the house within the next few months.