TheBakersfieldCalifornian.com

With about half of all mortgaged homes in the Bakersfield area stubbornly under water, a critical deadline is looming that hardly anyone seems to know about.

Usually when a significant portion of a home loan is forgiven, the difference between what was paid and what was owed counts as income at tax time.

Because of the depth of the housing crisis, however, Congress passed The Mortgage Forgiveness Debt Relief Act of 2007.

The law generally allows taxpayers to exclude the amount forgiven in a short sale from their taxable income. A short sale is a transaction in which a lender and a homeowner agree to sell a residence for less than the balance of the mortgage.

Under the law, up to $2 million can be forgiven on a loan for a principal residence. Investment property isn't covered. The limit is $1 million for a married person filing a separate return.

The law only provided for a temporary exemption, however, and that window will close at the end of this year.

With so many people in the Bakersfield area owing more than their homes are worth, logically there ought to be a massive rush to get short sales completed. But that hasn't happened.

"I think basically (homeowners) don't know about it," said Scott Tobias, president of the Bakersfield Association of Realtors. "With so many not being aware of it, it will be our job to educate them over the coming months."

The good news, Tobias said, is that short sales are closing faster.

"Most short sales aren't taking more than a year," he said. "In the past, they were."

In a short sale, a buyer presents a purchase offer to both the seller and the lender. In order for the deal to close, both have to approve. Sometimes, there are multiple lenders at the table due to second and third mortgages on a property.

It's a cumbersome process that requires lots of time and documentation, so it would behoove homeowners thinking of selling short to get started as soon as possible if they want to avoid the tax.

In the Bakersfield area, 29.2 percent of homes sold last month were short sales, according to Gary Crabtree, author of the monthly Crabtree Report on the local housing market.

"That's the problem," he said.

It's a pretty low number considering how many mortgages here are upside-down and how many homes are listed as short sales, Crabtree said, so there's clearly a backlog.

Anyone starting the short sale process today will have to get in line behind those who've already started.

Chris Thornburgh, a CPA with Brown Armstrong Accountancy Corp., said nobody has come in to her office indicating they're rushing to complete a short sale by the end of this year.

"There's been no flood," she said. "But I would be curious to see how things go in nine months, especially as word gets out."

Part of the problem is that most real estate agents aren't well versed in tax law and don't want to be in the position of explaining complex rules.

Jim Summers of RE/MAX Golden Empire said he warns people of possible tax consequences when that's an issue, but steers clear of getting too specific.

"I don't give tax advice," he said. "I refer clients to their CPAs."