Illinois foreclosure: Time may be running out for tax break

Congress has yet to extend the Mortgage Forgiveness Debt Relief Act that provides a tax break to qualified homeowners on debt forgiven by their lender. The act is set to expire on Dec. 31. If it is not renewed for 2013, Illinois homeowners could face huge tax bills for loan modifications, short sales, or foreclosure completed after the end of the year. The uncertainty of the law's renewal could mean a very busy fourth quarter.

In the absence of the protections currently provided by the law, any debt forgiven by a lender is counted as income for the homeowner. This would mean that already struggling homeowners who are unable to make their mortgage payments would then be subject to federal taxes they may not be able to pay either. Many are advising homeowners to do what they can to make sure that their modification, short sale, or even foreclosure is completed by the end of year. The theory is that it is better to be safe than sorry.

Congress may renew the Act at the last minute, but if lawmakers don't, many homeowners may have run out of time. Even so, there is only so much a homeowner can do to speed up the process. The rest is up to the lender. In order to take advantage of the tax break, the debt must be forgiven by Dec. 31.

For those Illinois homeowners who are unable to avoid foreclosure, a bankruptcy protection may be a responsible option. When a bankruptcy is filed, all collection efforts must be halted pending resolution of the matter before the court. In the meantime, the pressure is off the homeowner. The breathing space may give them time to determine whether to use the venue to come to an agreement with the lender to keep the house, or make the decision to leave the home and start fresh.

Source: Fox Business, "Short-Sellers, Act Now or Face Big Tax Bill," Polyana da Costa, Oct. 5, 2012

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