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Almost the worst thing that a struggling homeowner can hear is that even if the home is ultimately lost to foreclosure or short sale, taxes will still be due. In some cases, that will be the sad reality for many homeowners who have an underwater mortgage. A federal act, the Mortgage Debt Forgiveness Relief Act, expired at the end of 2013. This act protected homeowners from having to pay taxes on the amount of money forgiven in a short sale or foreclosure. The expiration of this act will likely affect many of the more than 1 million homes in Florida that are currently underwater.

The act gave homeowners who were forced to sell a home for less than the mortgage balance some financial stability, since the homeowner wouldn’t have to pay taxes on the amount forgiven. Since this act expired, a homeowner who falls into the 25-percent tax bracket and sells a home for $100,000 less than the mortgage balance will have a $25,000 tax bill from the sale of the home. For some, this will just add insult to injury, since they are already in a dire financial situation.

It isn’t just homeowners who lose a home to foreclosure or who sell a home using a short sale who are affected by the expiration of this act. Homeowners who go through a mortgage modification or principle reduction are also going to see bills for the forgiven amounts on the mortgage.

For a homeowner who is already struggling to keep up with bills, learning that they may have to face a huge tax bill like the example given above is stressful. If you are facing this type of situation, you may have legal avenues that may help you get a fresh financial start.

Source: Tampa Bay Times, “Expiration of mortgage-forgiveness tax break triggers fears for distressed homeowners” Drew Harwell, Jan. 14, 2014