According to the tax relief law, the homeowners were able to exclude certain debts that were considered as income by the IRS. But all those who are planning to benefit from these need to be aware of the fact that this tax break is about to expire on December, 31st, 2012 and that a foreclosure or a short sale may take many months to complete. During the housing crisis and during a time when the mortgage rates are at their lowest levels, a window is soon closing on the most important tax-relief provisions that have been enacted by Congress for all the financially needy homeowners.

Presently, the previous law is still in effect (that which was passed in 2007) and it still allows the struggling homeowners to exclude the amount of debt that is cancelled by the lenders until December, 2012. However, it is most likely that the financially strapped homeowners will certainly persuade the banks to either foreclose their real estate property or sell it off for an amount that is less than what they’re worth. This doesn’t mean that the struggling homeowners who are finding it difficult to hold on their properties should let go of their homes due to the pending tax cuts under the Mortgage Debt Relief Act, this is certainly something that needs your attention.

Under the Mortgage Debt Relief Act, any kind of borrowed money won’t be reported as income that you’re obligated to repay the amount but whenever the lender cancels an amount, this is considered as income by the IRS and therefore this becomes taxable. For instance, if you owe $250,000 and the mortgage lender forgives about $50,000 of the debt when you refinance for $200,000, then this is known as income ($50,000). With a combined tax rate of 36%, you will owe at least $18,000 as taxes. Under this particular act, the taxpayers are allowed to exclude from their income at least until the beginning of 2013.

Therefore, when your mortgage lender agrees to sell your house at a price that is less than the market price of the home, there’s no tax between the amount that you owe and the selling price. Even when your lender forecloses your home, there will be no tax on the cancelled debt and when you refinance for a short term loan, there is still no tax between what you owed and the new one.

According to recent reports, an increasingly large number of struggling homeowners are persuading their banks to foreclose their home or accept a short sale agreement as it takes at least 4-9 months to complete the entire process. Only when you feel that this is the best option for you, you should choose to go for it. Don’t take any hasty decision just because the Mortgage Debt Relief Act is about to expire in 2012 as this may lead to a mess.