Ilyce Glink explains how to avoid paying taxes on forgiven mortgage debt if you’ve done a foreclosure or short sale in Real Estate Minutes.

If you go into foreclosure or complete a short sale, you could wind up owing tens of thousands of dollars to the IRS on your forgiven debt. But there’s a way to avoid all that – at least for now.

Through the end of 2013, homeowners who go into foreclosure and short sale and owe their lenders money will not be taxes by the IRS on this deficiency.

If you’re doing a HAMP principal reduction alternative program, your principal balance will be reduced over three years as long as you make your payments on time. If the IRS rules change in 20-14, you might owe tax on that principal reduction.

Avoid paying taxes by claiming all of the principal reduction on your 2013 tax bill, rather than spreading it out over 3 years. That way, even if the tax laws change, you’re protected.

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