By Mike Colpitts
Time may be running out for homeowners hoping to do a short sale on their home and not get hit with a big federal tax bill because they had 
to walk away from their mortgage. The Mortgage Forgiveness Debt Relief Act approved by Congress is scheduled to expire at the end of the year.
The program could be extended by Congressional mandate, but many housing analysts feel the act, passed at the height of the financial crisis won’t be extended. The law eliminates any federal taxes on mortgage debt that lenders cancel or forgive up to $2-million, and currently applies to debt forgiven from 2007 through 2012.
Bank assisted short sales allow mortgage holders to sell their homes at less than what they owe on a mortgage with the cooperation of the lender. Short sales are expected to increase during 2012 as a result of lenders’ realizing that troubled homeowners are unable to afford mortgage payments. Nearly one out of three U.S. homeowners are projected to be underwater on their mortgages at the current rate of housing deflation in June 2012.
Banks are required by law to provide the IRS with a Form 1099-C at the completion of a short sale or foreclosure, showing the amount of debt cancelled or forgiven. Before December 20, 2007, when the act went into effect, the amount of forgiven debt was considered to be taxable income.
The huge tax burden became such a massive problem for former homeowners that the special law was passed, giving troubled homeowners at least some financial relief.
Real estate brokers and agents specializing in the listing and sale of short sales have become the busiest in the industry, which is plagued by foreclosures and short sales.
“Sellers facing foreclosure must remember that banks are not looking out for you or your family,” said Bill Myers, a real estate broker who handled more short sales in 2011 than any other broker in Las Vegas, Nevada. “Our job is to get between you and the bank. We represent our clients, not the banks. It is our job to negotiate the best possible outcome. Ultimately, our job is to take away the stress, and make the transaction as smooth and stress-free as possible.”
The Mortgage Forgiveness Debt Relief Act only applies to primary residences, not investment properties in the case of short sales. But many homes and other properties purchased during the height of the housing bubble that are sold as short sales or foreclosed are sold at a loss, limiting the tax burden for investors.