The Mortgage Debt Relief Act of 2007 will expire at the end of the year, if Congress does not take action to extend it. Without that relief, homeowners who back out of their mortgages with a short sale or foreclosure have to pay taxes on the amount that is forgiven.
The Internal Revenue Service will levying taxes on the property as if the homeowners actually received the money. The tax relief is also available when debt (up to $2 million) is reduced as a result of a mortgage being restructured.
What does this mean to home owners who sell their home through a short sale?
“Let’s say you owe $150,000 on your mortgage, but your Realtor finds a buyer willing to pay $120,000. The bank approves the short sale and forgives the $30,000 difference. If you don’t complete the sale by Dec. 31, 2012, as of Jan. 1, 2013, that $30,000 in forgiven mortgage debt will be considered taxable income by the IRS.”