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Struggling Floridians have saved untold fortunes with a nearly five-year-old federal tax break that is about to go away.

Since 2007, homeowners whose banks have forgiven unpaid mortgage debt after a short sale, principal reduction or foreclosure have not had to count that money as income on their tax returns.

It's meant savings of tens of thousands of dollars on the so-called "phantom income" depending on the amount of debt canceled and a person's tax bracket.

But the Mortgage Forgiveness Debt Relief Act of 2007 will sunset Dec. 31.

With just six months before the scheduled expiration, accountants and Realtors are urging homeowners considering a short sale to put their properties on the market now so they can sell before year's end.

A short sale is where the lender agrees to sell a property for less than what the homeowner owes on the mortgage. Although banks are getting better at processing short sales, finalizing a contract can still take months.

"People are unaware that they could get a huge whack from this," said real estate attorney Clifford Hertz of Broad and Cassel in West Pam Beach about the tax break expiration. "If they know what's coming, they can make the right business decision."

That's just what Palm Beach Gardens homeowner Jeff Shingledecker did.

He put his home up for a short sale in April after researching the best exit strategy from his underwater mortgage. Within 24 hours of listing the home, he had a full price offer of $105,000 and is currently under contract.

Still, a successful sale will leave him with $118,000 in unpaid loan debt. If the bank forgives that balance, the money is taxable income. Considering Shingledecker's tax bracket, he would owe about $29,500 in taxes on that canceled debt. Under the debt relief act, he won't owe anything.

"This made the most sense," Shingledecker said about his short sale decision. "I looked at all the angles and assuming everything goes as planned this is the best route."

During the first quarter of this year, 6,649 short sales were completed in Palm Beach, Broward and Miami-Dade counties, according to the market research firm RealtyTrac. That was a nearly 55 percent increase from the same time in 2011.

Statewide, 15,949 short sales were conducted in the first quarter of the year, an 18 percent increase from the same time in 2011.

But not everyone can benefit from the debt relief act. It only covers forgiven debt on principal residences and up to $2 million, or $1 million if married but filing separately. The act also does not apply to second mortgages where the money was used for non-household expenses.

If a debt of $600 or more is forgiven, the lender is required to send homeowners a tax form 1099-C by Feb. 2 of each year. The form must state the amount of debt forgiven as well as the fair market value of any property given up through foreclosure or a short sale. Homeowners must report the forgiven debt on tax form 982.

There are other tax rules that can affect how homeowners benefit from the debt forgiveness act, but any relief for a homeowner right now is helpful, said Realtor Jared Dalto.

"Let's face it, they did not have the money to pay the mortgage in the first place so what makes the IRS think a homeowner can pay taxes on $200,000?" said Dalto, a short sale specialist with the Palm Beach Group at Seawinds Realty.

Josh Angell, an investment adviser with Moore Ellrich & Neal P.A. in Palm Beach Gardens, said depending on how much debt is forgiven, a homeowner could be pushed into a higher tax bracket. That means they'd not only owe on the forgiven debt but also at a higher rate.

"It's a very scary thing to think about when people are financially destitute," said Jon Maddux, CEO of YouWalkAway.com, a company that advises homeowners on short sales and strategic defaults. "It can put people in a situation where they will most likely have to file bankruptcy. They'd be insolvent."

In March, a bill was introduced in the U.S. House of Representatives to extend the Mortgage Debt Relief Act through the end of 2015.

Sponsored by Rep. Jim McDermott, D-Wash., the "Homeowners Tax Fairness Act," would also exclude from taxable income money received for wrongful foreclosure through the $25 billion attorneys general settlement.

The settlement is expected to give homeowners between $1,500 and $2,000 if they had a wrongful foreclosure.

Jupiter resident Michael Schoenewolff, who hopes to benefit from the debt relief act this year, said he believes Congress will vote to extend the tax break.

Schoenewolff has a short sale contract on his home that would leave him with $95,000 in forgiven debt.

"The average person can't handle another $100,000 in income to be taxed," he said. "I think they have to vote to extend it in order to allow the housing market and economy to recover."

Who's affected?

People selling their homes through a short sale or who are in foreclosure may have the unpaid balance of their loan forgiven by the bank. If so, that debt would be considered taxable income. The Mortgage Forgiveness Debt Relief Act excludes that income from being taxed through Dec. 31, 2012.

What's happening?

The debt relief act is scheduled to sunset at the end of this year. If no extension is granted, homeowners will have to pay taxes on any unpaid balance forgiven by a lender after a short sale, modification or foreclosure.

How does it change your sale?

If you are considering a short sale, you may want to put your home on the market now so a sale can close before the end of the year and qualify you to take advantage of the debt relief act before it expires.

What's next?

A bill called the "Homeowners Tax Fairness Act" was filed in March that would extend the tax debt forgiveness program through 2015. It requires congressional approval.

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(c) 2012 The Palm Beach Post (West Palm Beach, Fla.)

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