Why you want to close this year
When homeowners negotiate a short sale, banks are legally required to report the forgiven debt to the IRS. The homeowner now has to pay income tax on this amount. In many cases, the tax responsibility can end up being tens of thousands of dollars.
The Mortgage Debt Relief Act of 2007 offers many homeowners relief from having to pay income taxes on forgiven mortgage debt, saving them from trading one unmanageable payment for another. But barring an act of congress, the Mortgage Debt Relief Act is set to expire at the end of 2012.
For distressed homeowners, this means that time is running out to close their short sales and take advantage of the program.