Why A Duplex Short Sale Could Save You Taxes

If you’re considering selling your duplex as a short sale, if you don’t act soon, further delay may result in your owing taxes.

Historically, if a lender forgives some or all of your debt, with certain exceptions, the borrower must pay tax on the forgiven amount.

Thanks to the Mortgage Debt Relief Act, however, a borrower can be excused from paying taxes on forgiven mortgage debt on a principal residence. (In other words, the debt and tax forgiveness applies only to owner occupants.)

And this applies in the event you’re able to stay in the duplex thanks to a principal reduction , taxes on the amount of the reduction will be forgiven.

Here’s the problem. The current law for this tax forgiveness expires on December 31, 2012.

While there’s always the possibility Congress will extend this deadline, encouraging economic news may spell the end of some of the government’s recent incentives.

Stay tuned.