The end of the year is rapidly approaching and so is the expiration date of the Mortgage Forgiveness Debt Relief Act.

The Act was passed by Congress in 2007 at the start of the housing bust. This Act protects homeowners from being taxed on the forgiven debt banks write off if the homeowner is successful with selling their home as a short sale. This Act has helped give homeowners and lenders a favorable alternative to the devastation caused by foreclosures.

So what does this truly mean? Let’s take for example a homeowner that is currently in a negative equity position (they owe more on their home that it is worth): Mr. & Mrs. Smith own a home that has a current market value of 225,000 and a mortgage balance of 300,000. The Smiths need to sell and will be putting their home on the market next week. Unless the Mortgage Forgiveness Debt Relief Act is extended before the end of the year the Smiths have less that 109 days to get their home listed, get an offer, get the offer approved by their lender and closed BEFORE December 31st or they could face a significant TAX burden. You might be asking “What Kind of Tax Burden”? If the Smiths are successful in getting an offer for $225,000 and after considering all of the Smiths closing costs, the lender may likely have to forgive $90,000 of their loan balance in order to make the sale successfully close. If the Smiths close before December 31st, they would likely not be taxed on the $90,000. If they close after December 31st, depending on their tax bracket, they could owe income taxes on the $90,000 that was forgiven. Do the math! Let’s assume they are in a 30% tax bracket, they could be faced with paying $27,000. OUCH!

Realtors need to make certain that they are educating their clients and discussing alternative strategies. Timing is critical! MOST importantly, have sellers seek additional guidance from their CPA’s as the deadline approaches.