There is an old cliché that states, no situation is so bad that it can't get worse. Chances are pretty good that if you are a homeowner who may have to lean (or already are leaning) on a short-sale solution, or if you are facing foreclosure, your finances are not in tip-top shape. Now comes the news that unless Congress swoops in to save the day, you will incur a federal income tax charge on any part of your loan that was previously forgiven.

To figure out how this whole situation came about, you need to travel back in time to the year 2007. It was then that the United States Congress passed the Mortgage Debt Relief Act. What this meant for the countless number of homeowners who needed to transact a short sale, reconfigure their mortgage, or deal with a foreclosure was that they were able to have a portion of the principal balance forgiven without having to pay income tax on it.

Now, after five years of providing coverage to those folks, the Mortgage Debt Relief Act has one metaphorical foot in the metaphorical grave, with the other foot poised to fall at the end of the year, when the act will expire.

In order to give you an example of this works, let's create a hypothetical scenario. Let's say that the act is allowed to expire at the end of this year. It is now 2013 and you are a homeowner who decides to transact a short sale on your home for $120,000, and your home has an appraised value of $150,000. Upon completion of this short-sale transaction, you will receive a bill from the federal government in the form of income tax owed on the phantom $30,000 worth of forgiven debt. This is because without the Mortgage Debt Relief Act, the federal government now considers that $30,000 income and it is therefore taxable. 

Hope is on the horizon, however, for those who want the act to remain in place. One of the loudest voices proclaiming its benefits and shouting, as it were, for it to be maintained is the National Association of Realtors (NAR). Their team of lobbyists is endeavoring to convince Congress to extend the Mortgage Debt Relief Act beyond the 2012 expiration date. Apparently their efforts, and no doubt the efforts of other like-minded people, are doing some good because a number of legislators in both the Senate and House of Representatives have already introduced bills that would extend the tax relief. It’s certainly something to keep an eye on for those involved in short-selling their properties.