Have you reached the point at which you KNOW you aren’t going to be able to keep your current home, and the only question now is how can you get out with a minimum of lasting harm? Moving fast is probably your best bet!

If you complete your short sale in 2013, you won’t owe federal taxes on the transaction, thanks to Congress, which extended mortgage cancellation relief through the end of 2013. So home owners who have a portion of their mortgage forgiven as part of a workout plan, short sale, or foreclosure before Jan. 1, 2014, won’t have to pay income tax on the forgiven amount.

What is a short sale? It beats a foreclosure by a mile. In a short sale, the lender agrees to let you sell your house for less than what you owe on the mortgage.

One of the most common reasons for a short sale is an upside down mortgage combined with financial difficulty.

If you have $200,000 left on your mortgage, but the real estate market is depressed and you can only sell your house for $150,000, your lender can agree to let you sell the house and take $150,000 instead of the $200,000 you owe. They forgive the $50,000 difference between the $200,000 you owe them and the $150,000 you sold your house for.

If you can complete your short sale before Jan 1, 2014, the $50,000 the lender forgave won’t be subject to taxation. That’s because in 2007 and again in 2008, Congress told the IRS to stop collecting taxes on forgiven debt until 2013, and then extended it to 2014!

Before the 2007 law, home sellers 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! Many hope that Congress will renew this tax benefit, but here we are with just 5 weeks to go and no word. Selling your home now could make a huge difference in your tax bill!

Of course, even if Congress doesn’t renew the law, and you end up having to short sale in 2014, you may be able to avoid taxes anyway. If what you owe to all of your creditors exceeds the value of everything you own, you may not owe tax under the insolvency rule. You’d do best to check with a tax attorney experienced in IRS rulings.