The Mortgage Forgiveness Debt Relief Act expires on the 31st of December 2012, and since short sales take a minimum of six months to complete, the income gained from the selling of a foreclosed home could be, once again, eligible for taxation.

Millions of homeowners are now facing this grim reality because previously the income gained from the sale of a house undergoing foreclosure was tax-free, but after this year this won’t be the case anymore.

That’s why homeowners are now been urged to sell their homes immediately if they are heading for possible foreclosure to avoid the taxation.

This news is even more terrifying because the Federal Reserve and multiple market analysts have predicted that 8 million new foreclosures could be on the horizon within the next few months. The only hope is that the Government considers extending this act to aid these people. But, assuming they don’t, then many homeowners will seriously have to think about whether they can conceivably prevent foreclosure of their homes or not. Although, due to the fact that short sales can still take a minimum of 6 months to complete, this decision must be made soon.

The concept of a short sale is where if a home owner is facing imminent foreclosure then they may decide to sell their house through a real estate agent to get whatever they can out of it. Under this act, if a seller owed $100,000 on their home but the only bid they could get was for $50,000 then the seller could take this offer and avoid having a foreclosure record on their credit report. However, if the house is sold after 2012 then this $50,000 difference could then turn into taxable income.

This means that cash-strapped home owners all across America could be thrown into further problems if they sell after this act expires because how can a home owner who owes so much be conceivably classified as being fit and able to pay back even more on the money still owed? The answer is that they can’t, which makes this act crucial for so many home owners.

Originally, the debt relief act was brought in to protect Americans against the bursting of the housing bubble in 2007, but this act was brought in because nobody expected the housing crisis to continue on past 2012. Yes, the act only covers personal residences, and that doesn’t include second homes, but if the act isn’t renewed then even personal residences will be left unprotected.

A veteran of the real estate industry, Donna S. Robinson, had the following advice for those who may be facing foreclosure of their personal residence in the future:

“If you are 2 to 3 months delinquent right now, you may want to think about going ahead with plans to get a short sale approved with your lender, if you think a foreclosure may be inevitable. Time is running out.”

As of March 2012, there are currently no plans to extend the act or even consider extending the act, so people who have already lost everything will likely be forced to pay income tax on their own financial ruin come 2013.