Danette O'Neal, PhD

Tax rules that let you escape paying federal income tax after a short sale expire this year.

If you can’t afford your mortgage and know you’re going to eventually have to sell your home via short sale, you might want to get going on that sooner rather than later. If you complete your short sale in 2012, you won’t owe federal taxes on the transaction. If you wait until 2013, you could owe a hefty federal tax. In a short sale, the lender lets you sell your house for less than what you owe on the mortgage.  Before the 2007 law passed, you had to pay federal income tax on forgiven debt. If your lender forgave $50,000, the IRS said that $50,000 was income. If you were in a 28% tax bracket you’d owe $14,000 (.28 x $50,000) in federal income taxes. Here we are 12 months away from the deadline, and it’s anybody’s guess whether Congress will renew that no-taxes-on-forgiven-debt rule. It’s just one of literally trillions of dollars of tax benefits expiring at the end of this year, and there’s no signal yet as to what, if anything, Congress will do about any of them.