Did you know that debt forgiven during a short sale or debt-forgiveness program is subject to tax (since the IRS considers the amount of the forgiven debt as income)? Most people don’t – and that could result in significant financial stress come tax time.

Under normal circumstances, the amount of debt forgiven by a lender on the behalf of a homeowner is taxed under standard income tax rates by the IRS. For example, if the owner of a $250,000 home still owes $125,000, is facing foreclosure, and wants to work with the lender to forgive the remainder of the $125,000 loan amount, he or she would have that disparity taxed. For most homeowners, that amount would be significant and could result in anywhere from 15% to 35%.

Of course, thanks to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners in this situation can exempt up to $2 million on a principal residence (or $1 million for someone who is married but filing separately). For most Americans who are in this situation or have been since the housing market took a steep nose-dive in 2007, that is a welcome relief.

Unfortunately, the very same law that was such a boon for so many homeowners is set to expire at the end of this year. Much like other propositions and laws at the federal level, there is no guarantee that the law will be extended, even though there would be much pressure from constituents and consumer advocacy groups to continue the legislation. After all, the wildly-popular First-Time Homebuyer Credit was not renewed even though it arguably led to a spike in home sales that was desperately needed at the time of its inception in 2009.

Homeowners who are considering entering into a short sale transaction as a way to stop foreclosure need to be mindful of the tax considerations involved in the property transfer – especially those considering principal reductions with their mortgage loans. Since loan modifications take months on average to complete – and many fall by the wayside and fail during that timespan – homeowners caught unawares could be penalized heavily at tax time with an unexpected bill.

Also consider the fact that a deed in lieu of foreclosure – another common alternative to foreclosure in addition to a short sale- may also result in a taxable income situation if the law should expire. Homeowners should consult a certified tax attorney for qualified legal advice.

According to market analysts, in various regions of the U.S., it is usually investors and home flippers who purchase majority of repossessed or foreclosed houses. Locally, realtors are reporting that a bigger percentage of foreclosures in Philadelphia are getting acquired by first time homebuyers and traditional purchasers, most of whom work in the pharmaceutical industry and are often looking for high-end distressed residential properties.

Realtors in the region revealed that around 85% of current buyers of foreclosures in Pennsylvania are accounted for by first time purchasers. These homebuyers, realtors have reported, are commonly drawn towards residences priced between $130,000 and $330,000. A big number of these traditional buyers, realtors further added, are willing to fix up these repossessed properties and most are looking for higher-end distressed homes, with some purchasing foreclosed houses for a price of as high as more than half a million dollars.

Real estate agents in the area also reported that securing financing is not as difficult in the region like in other U.S. markets. According to them, even without the tax credit, most buyers are able to find financing for their purchases, particularly in sections of Philadelphia where mortgage defaults are relatively lower. Unlike most metropolitan markets of the U.S., foreclosure sales in Philadelphia are reportedly not dominated by all-cash transactions and FHA-insured deals.

Realtors have explained that a huge percentage of local lenders are willing to provide financing to people who buy foreclosed homes because they are eager to unload their real estate assets. The only problem, agents have revealed, is disagreement over property valuations, which is often resolved by lenders asking for higher down payments. In terms of actual purchase prices, realtors reported that distressed dwellings' selling rates are nearer to fair market value in Philly than in other regions of the U.S.

They revealed that this is because Philadelphia has not been hit as hard by the foreclosure crisis. Realtors further added that even without the tax credit to push them towards home-buying, most metro area residents are willing to purchase homes in the region. The biggest job for realtors though, is making buyers understand that they are purchasing repossessed homes in an "as is" condition.

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Foreclosure homes in Omaha and in the rest of the state did not reach levels as high as in other hard-hit areas like Nevada, Arizona and Florida, but a lot of current homeowners still took advantage of the government offer, particularly those who wanted to have their own homes. The first time the initiative was introduced, the loan was worth as much as $7,500, with no interest attached to the loan.

The second one was a credit worth $8,000, with repayment not required as long as homeowners stay in their purchased homes for the duration of the specified time, regardless of whether they purchased Nebraska foreclosures or a regular home. Analysts explain that those who took out credit under the original form of the initiative, the $7,500 amount to be exact, are the ones who need to think about payment now. Under the initiative, borrowers are allowed to pay the total amount once for the next 15 years, with zero interest.

This means that, for those who got the maximum amount from the original foreclosure tax credit, they will be paying $500 each year in the next 15 years. It does not sound bad, but experts remind borrowers that the no-interest, 15-year spread out payment only applies if the borrower still lives in the home he purchased using the tax credit money.

For those who have converted their homes into rental dwellings or made it their vacation or second home, then they need to pay for the full remaining amount on the coming tax return. For those who lost their purchases to foreclosures and were able to sell them as distressed properties, they will be required to pay an amount equivalent to what they gained from the foreclosure sale, if they did have any gain at all.

For those who sold their homes, not as a foreclosure but as a regular property, they will have to pay an amount equivalent to their gain on the sale. There are other provisions in the foreclosure tax credit that borrowers need to examine since they cover various possible scenarios for homeowners. Analysts stated that it is important for recipients to know which provisions are applicable to them.

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The housing market crisis affected various areas of the state, including Decatur foreclosure investing, so it was not surprising that thousands braved the heat to line up in front of the East Point Housing Authority headquarters to submit their applications. The sheer number of applicants led to chaos which reportedly resulted in several injuries.

However, these applicants were not just East Point or Decatur residents or families affected by Georgia foreclosed homes as the initiative is a federal one and anybody can submit an application. Authorities at the East Point housing office were able to gather the applications in an orderly manner on Thursday, preventing a repeat of the mob-like scene the day before.

After the federal housing tax credit expired, a lot of people see the government housing subsidy program as another chance to get a home. However, housing authority officials have admitted that majority of those who submitted applications will likely wait years until they can get housing assistance under the program.

They explained that it is not as easy as being given money by the government to purchase foreclosure houses for sale or being provided occupancy in a subsidized apartment unit. Applicants will be included in a list and selection is not first come, first serve. Officials explained that several factors will be used in choosing successful applicants, including employment status, disability, age, size of the family, financial status, etc.

Housing authority officials have stated that there are around 650 residential spots available comprised of around 200 public home units and a little over 450 vouchers that will provide private home rent assistance. They also stated that it is highly possible that it would take at least half a year before any vacancy can be found and that applicants could be on the waiting list for years without getting a spot. Despite these not so encouraging words, most families, like in the case of the federal housing tax credit, are willing to take their chances.

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A total of 4,365 pre-owned Denver homes and condos were sold in May, an increase of over 20 percent from total sales in May 2009. Pending sales, however, dropped by about 27 percent year-over-year to 3,883 units, due in part to the tax credit expiration.

The federal tax credit deadline also revved up the speed of house sales. Homes and condo units stayed on listings for only about 76 days in May, a sharp improvement of 28 percent from May last year and 5 percent from the previous month.

A number of those who planned to buy foreclosed homes for sale in May could have deferred their plans as Denver home auctions slowed. Only 209 Denver homes were posted for foreclosure sales, down by more than 19 percent from the preceding month. Foreclosure filings also fell to 375, down by 10.5 percent from the April total.

Home auctions in Colorado also slowed in May. In the 12 largest counties in Colorado, which are Denver, Adams, Boulder, Arapahoe, Douglas, El Paso, Broomfield, Mesa, Larimer, Jefferson, Weld and Pueblo, foreclosure filings declined by almost 18 percent year-over-year and by more than 16 percent from the total in May 2008. These counties posted a total of 1,459 foreclosure sales, down by nearly 20 percent from April.

Another foreclosure report also highlighted the slowdown in foreclosures in Colorado, as the state got out of the top-ten listing and was replaced by Maryland.

With the improvement of the Denver economy, sellers and real estate professionals hope that the housing market continues to improve even without the federal tax credit scheme.

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Just like in many other cities, the tax credit expiration was an added benefit for homebuying in the first quarter, in addition to the benefits of lower mortgage rates, lower home prices and more choices of existing and newly-built properties.

Pending home sales contracts in Greater Philadelphia also soared in the first quarter to a total of 15,003 units, a spike of almost 23 percent from the 12,216 contracts signed one year earlier. The county of Philadelphia posted the highest sales, with a total of 2,465 units sold, marking an increase of 14.4 percent.

The other best performing markets were Montgomery County, with a sales total of 1,328 and an increase rate of 14 percent; Bucks County, with 963 homes sold and a spike of 16 percent; and Delaware County, with 868 units sold and a jump of 5 percent.

It was Chester County which posted the highest increase in price – a median price jump of almost 9 percent to $288,000, far above the median price for all homes sold in the first quarter in the Philadelphia area, which was $200,000. One year earlier, the median price was $199,000, indicating a year-over-year increase by only $1,000 or 0.5 percent.

The rush to beat the tax credit deadline also reduced the number of days homes stayed on listings from 95 days to 93 days and reduced the average stock of homes for sale in the region by two percent from 76,648 in the first quarter last year to 74,964 in the first quarter this year. The inventory two years earlier was even higher at 83,513.

Among frenzied buyers in the first quarter were people engaged in Philadelphia foreclosure investing. A large number of them no longer qualified for the tax credits, but they were beating further price increases and taking advantage of low mortgage rates and good inventory.

The number of houses repossessed by lenders through foreclosure auctions in Pennsylvania in the first quarter was 3,536, accounting for 24.04 percent of all postings during the quarter. Lis pendens notices totaled to 5,406 and foreclosure sale notices totaled to 5,767, putting the total of pre foreclosures at 11,173.

Finding foreclosed house listings and looking for an affordable home to buy in Pennsylvania is still fairly easy to do as filings continued to increase in the state in the first quarter. The 14,709 homes put into the foreclosure process during the quarter marked a 25-percent jump from a year earlier and a seven-percent jump from the prior quarter.

Compared to other states, Pennsylvania has generally held up well during the housing crisis, as it has been occupying the lower portions of foreclosure charts since the downturn started.

Additionally, federal, state and local foreclosure prevention programs, including the tax credit incentive scheme, had relatively good results in the state due to efforts by nonprofits and public-private alliances.

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Closed sales of pre-owned homes spiked by a whopping 24 percent year-over-year to 4,188 units, also marking more than 16 percent of increase from the previous month.

The total of single-family homes and condo units put under contract reached 6,616 units, up by a stunning 28 percent compared to one year earlier and up by 12 percent from the previous month. More than 78 percent of these or a total of 5,167 units were single-family houses.

Denver realtors said many of them were still working on sales contracts up to the last hour of April 30, as buyers were beating the expiration of the federal tax credits, which ended on that day. Sales contracts signed on April 30 but not yet closed can still qualify for the tax credits as long as they close on or before June 30.

Another factor that enticed buyers to buy in April was the still attractive price levels that resulted from the price impacts of REO homes. Foreclosed houses for sale in Denver County reached a total of 710 units in the first quarter, comprising 35 percent of the more than 2,000 foreclosure filings posted during the quarter in the county.

The average price of housing units sold in April was $274,253, down by 0.25 percent from the $274,950 average in the previous month, but marked an increase of 7.8 percent from the $254,442 average price in April last year. These price comparisons helped push sales in April as prospective buyers figured they had to buy before the pace of Denver foreclosure auctions slow down substantially and prices will shoot up again.

In the first quarter, the pace of foreclosure postings in Denver County surged by more than 22 percent compared to the previous quarter and by nearly 24 percent compared to one year earlier.

Similarly, the pace of foreclosure auctions in Colorado surged from the prior quarter, but at a much lower rate than Denver. Total foreclosure filings statewide rose by 8.99 percent from the last quarter of 2009 to a total of 16,023 filings, comprising 1.72 percent of total filings nationwide.

All in all, the double-digit increases in house resales in Denver in April amid the double-digit surges in foreclosure filings and REO homes in the first quarter indicate the strength of the metro area’s economy.

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Industry economists have predicted that home sales will increase to a 5.35 million annual rate. They said that the housing market has to thank first-time homebuyers who decided to take advantage and apply for the $8,000 tax credit and the low-priced properties.

But the federal program is about to come to end by November 30. Already, several efforts have been launched to seek the expansion and extension of the federal program.

Advocates pointed out that without the federal program, the housing market would be slow to recover. However, some economists said that the program has merely shifted sales from one time to another and has not done much to treat the gaping wound in the housing market.

They acknowledge that the housing market really showed some improvements in the past few months as indicated in the reduction of inventories. According to market data, the total number of properties on the inventory dropped by 7.5 percent to 3.63 million by the end of September.

However, some economists do not put much faith on the numbers which they claimed do not include the shadow inventory. They explained that the shadow inventory is largely composed of bank-owned properties and were not on the market list.

On the other hand, some economists think that extending the federal tax program may not be a good move on the part of policymakers. They said that the government is subsidizing the program and spending money that it does not have. They pointed out that people have to learn to prepare themselves to grow at a sustainable way rather than rely on government stimulus which is currently driving the economy.

Meanwhile, the Internal Revenue Service is conducting an investigation on the over 100,000 shady claims for tax break. So far, there were nearly 1 million tax break claims which means a 10 percent rate of potential fraud.

Market data also showed that median home price continued to drop with last month?s price declining by 9 percent to $174,000. Economists said that tax credit could not prevent prices from dropping another 5 percent on the coming months

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However, they advise homeowners to exercise caution when signing any documents. They said that purchasing a wrong house at an unreasonable price using a bad loan is worst than missing the federal credit deadline.

Industry experts and officials from various state agencies recommend that first-time homebuyers seek guidance during the purchasing process. They said that many nonprofit agencies in the state are providing free assistance for first-time homebuyers in the form of counseling, classes and tips.

Some of these counseling agencies approved by the U.S. Housing and Urban Development (HUD) are Columbus Urban League, Columbus Housing Partnership, Mid-Ohio Regional Planning Commission, Homes on the Hill and Ohio Housing Finance Agency.

Another thing that first-time homebuyers who are interested in buying from foreclosure property listings should do is to prepare their monthly budget of income and expenses. It would be a big help for them if they could monitor their expenses and income for several weeks to allow them to get a clear picture of where their money goes and how to get more.

When planning their budget, homebuyers should spend not over 28 percent of their total monthly income on mortgage and not over 36 percent on other financial obligations such as child support, credit card debt and car payments.

Talk to lenders. According to industry experts, potential homebuyers should start communicating with their lenders before shopping for properties. This is to ensure that they can close a sale before the deadline for availing of tax credit.

Homebuyers also should pre-qualify for a home loan and the amount still needed to complete the sale. Negotiate with at least two lenders and get their estimates to compare costs. Experts said that homebuyers should always bear in mind that just because they qualify for a $200,000 house does not mean that can easily afford it.

There are some programs in Ohio that provide assistance to first-time homebuyers who are interested of making a purchase on foreclosure property listings. Some of these programs are down payment assistance and grant to pay for about 2.5 percent of the total purchase price.

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The $8,000 tax credit, part of the government foreclosures program launched this year, is available to taxpayers who are buying their own homes for the first time in 3 years and who can complete their home purchase before December 1, 2009.

Qualified home buyers can claim their $800 tax credits on their 2008 tax returns through an amendment or claim the credits on their 2009 tax returns.

Recognizing opportunities in this provision of the government foreclosures program, several states have created loan programs that would advance the tax credits to qualified taxpayers so they could buy their homes and help reduce the glut of foreclosed homes and other homes for sale. The loans are provided as second mortgages that would be paid when the home buyers receive the $8,000 tax refunds from the IRS.

Missouri takes the credit of having first thought of the scheme using the government foreclosures program. Its scheme allows home buyers to advance the tax credit, up to six percent of the home sales price, without interest and pay it before June 2010.

If the advanced tax credit is not paid, it would be converted into a 10-year fixed-rate second mortgage. Missouri also requires that the first loan is a 30-year fixed-rate loan issued by lenders participating in Missouri Housing Development Commission's bond programs.

Meanwhile, the state of Washington, which is already running its tax credit loan program, plans to expand the program into a down-payment program. James McIntire, the state treasurer, has proposed the creation of an interest-earning public-private partnership fund that would help prospective home buyers with their down payments.

McIntire recommended the investment of $25 million into the private-public fund, which is deposited in a bank that would provide credit lines to the Washington Housing Finance Commission for its down payment loan schemes.

Other states which have launched their own loan initiatives using the government foreclosures program's $8,000 tax credit provision are New Jersey, Delaware, Tennessee, Ohio, Pennsylvania, Idaho and New Mexico. Some states added low interest rates on the loans; some offered the loans interest-free for certain periods.

As these loan programs make progress, more states are expected to create their own schemes from the tax credit provision of the Obama's government foreclosures program.

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