As if losing your house to foreclosure is not bad enough, you could end up liable for IRS taxes on the amount of debt your lender might ’forgive’ during a “short sale” (where the lender lets you sell for less than you owe) or other workout arrangement.

Known by some wags as the IRS “kick em while they’re down” law, it works like this:

Let’s say you own a house with a $200,000 mortgage and can sell it for only $180,000. In a typical ‘short sale’ the lender would agree to accept your $180,000 offer and write off the difference of $20,000 between what you owe and what you get.

A lender would do something like this not because they’re nice guys but because it costs them upwards of $50,000 in legal fees and other losses to foreclose on a property so if they can walk away with “only” a $20,000 loss it’s a not too bad deal for them.

Unfortunately, under the current tax code the IRS considers any forgiveness of mortage debt as somehow ‘income’ to you and fully taxable at your regular rates. Talk about adding insult (along with a potentially huge tax bill) to injury!

In some extreme examples, homeowners can spend months negotiating with creditors and just when they think they can see some light at the end of the proverbial tunnel the IRS has hit them with a tax bill that in some cases exceeds their annual income.

One of the things I’m very proud to say the National Association of Realtors is working to change is that portion of our tax code.

 25,000+ Realtors were in Washington D.C. this past April for our annual mid-year meetings. We all met with our local representatives and some other federal departments and urged them to consider repealing this law.

We are in full support of The Mortgage Cancellation Relief Act of 2007 (H.R. 1876) which is now in the House Ways & Means Committee.

We could use your help in getting this important legislation passed. If you’re willing here’s a link to your Congressional Representative where you can drop them a note telling them you support the passage of The Mortgage Cancellation Relief Act of 2007 (H.R. 1876)