If you are facing foreclosure or considering short-selling your home, you need to act FAST! The Mortgage Forgiveness Debt Relief Act of 2007 is set to expire December 31, 2012, just over two months from now.
What does this mean?
When you short-sell your home, you end up selling your house for less than the debt owed by making a deal with the bank. The bank will forgive a portion of the mortgage, which becomes a taxable income. The current debt relief act allows homeowners to be exempt from this tax, but this will not be the case starting January 1, 2013.
If short-sellers do not close by the end of the year, they could lose a lot of money, namely 10-35% of the forgiven debt, depending what tax bracket applies. If the bank forgives $200,000 of your mortgage, and you are in the 25% tax bracket, one of the middle brackets, you will have to pay $50,000 in taxes.
While selling your home may not be the most appealing option, it may be the most pragmatic way to prevent future financial hardships.