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Last chance for short sales

By Polyana da Costa ·
Friday, January 13, 2012
Posted: 9 am ET

If you plan to unload your home through a short sale, get moving. 2012 may be your last chance to sell a home that is worth less than what you owe without having to face tax consequences.

When lenders approve a short sale, the difference between the sale price and what is owed on the mortgage is taxable. But homeowners have been exempt from being charged taxes on that difference since 2007, when the Mortgage Forgiveness Debt Relief Act was passed. The law expires at the end of this year. Unless the government extends it or implements a similar provision, those who sell through a short sale or lose their homes to foreclosure will be stuck with a high tax bill.

For example, if you owe the bank $250,000 but sell your home for $200,000 through a short sale, you will be liable for federal income tax on $50,000, starting January 2013. The same goes for a foreclosure. If the bank forecloses on your home and after foreclosure it sells the home for less than what was owed on it, you may be responsible for paying taxes on the difference.

Many real estate and mortgage specialists expect Congress to extend the provision. But there is no guarantee it will happen.

"I can't understand why they would want to impose more burden on consumers," says Howard Ullman, an attorney and owner of Family Counseling Law Firm in Deerfield Beach, Fla.

Yes, a tax burden on consumers who go through short sales or foreclosure wouldn't make much sense. But as you know, not all government actions make sense. If you think you'll need to short sale your home at some point, try to do it this year.

Follow me @Polyanad.

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