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To take advantage of tax relief, homeowners must sell soon

Many homeowners who were hit hard during the housing crash and subsequent recession had the unpleasant experience of getting a foreclosure notice or resorting to a short sale. The Mortgage Forgiveness Debt Relief Act of 2007 was designed to help alleviate some of the burden of homeowners who are underwater on their mortgage, meaning they owe more than their home is worth. Whether through a short sale or foreclosure, former homeowners would not have to pay taxes on the forgiven amount, thanks to the new law.

That act is set to expire at the end of this year, and realtors are recommending that homeowners facing financial ruin take advantage of it while they still can. Unless Congress extends the tax relief, homeowners will have to pay taxes on the amounts they have been forgiven. For example, if a mortgage is worth $250,000 but the house sells for $200,000 in a bank-approved sale, the bank forgave $50,000. In 2013, unless Congress extends the act, homeowners will be taxed on that $50,000 because it is viewed as income.

Though homeowners have until the end of the year to take advantage of the tax relief, experts in short sales suggest getting started sooner rather than later. Short sales are not short because of how long they take. They are short because they fall short of the desired price. They also tend to take longer than normal sales. One attorney said that it is not uncommon for short sales to take six to nine months, and some can take more than a year.

In addition, some lenders are paying homeowners to put their homes on the market. Some are even paying premiums for homeowners to take care of the homes while it is put up for sale. Along with the Mortgage Forgiveness Debt Relief Act, some are calling this a "win-win" for everyone involved.

Source: NBC 2 News, "Realtors pushing short sales," Elizabeth Billingsley, Jan. 16, 2012

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