By Greg Perry
The fiscal cliff package that was approved this week includes a provision that will help maintain a viable short sale market in the year 2013.
The Mortgage Forgiveness Debt Relief Act was set to expire on December 31, 2012. This act provided an exemption to the normal rule that forgiven debt is taxable income. The act allowed many homeowners to avoid income tax liability on the mortgage debt forgiven in a short sale. This week, Congress passed the "American Taxpayer Relief Act of 2012" which extends the income tax exemption on forgiven mortgage debt for one year. This means that homeowners who short-sell their principal residence and are forgiven the obligation to repay some or all of the unpaid balance may exclude the qualified cancelled debt from their taxable income. This should serve to promote short sales in the coming year as it will enable homeowners to continue seeking forgiveness of mortgage debt in a short sale without being taxed for it. The exemption also applies to any qualified debt forgiveness in a loan modification, refinance, or foreclosure.