Short Sale exeption ends Dec 31st 2012As more underwater homeowners pursue short sales and principal reductions, they may not realize they are facing a deadline.If debt you owe on your primary home is forgiven by Dec. 31, you will not have to pay federal income tax on that forgiven debt, as long as it was used to "buy, build or substantially improve your principal residence."But if that debt is forgiven after 2012, borrowers will once again owe income tax on that amount. If you do a short sale and your lender writes off $100,000 of what you owed, that could mean a hefty tax bill. The same goes for foreclosure, in some states, or principal reductions that are part of mortgage modifications.September 19 2012 - Spring Hill00YesReport a ProblemProblemSelect oneOffensive contentIrrelevant contentSpam (pure self-promotion)OtherDetailsYour emailPlease enter a valid email address.Submit CancelContent flaggedWe will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.We're sorry. This service is temporarily unavailable. Please come back later and try again.