A tax break for forgiven mortgage debt that was set to expire December 31 was extended by lawmakers when they dodged the fiscal cliff this week.
The tax break, which has been extended to the end of 2013, allows homeowners facing short sales, reduced loan principals, or foreclosures to avoid paying taxes on any debt still owed to the bank. Otherwise, the debt would have been taxed by the IRS as income.
The tax break first took effect in 2007.
Some homeowners had rushed to complete short sales before the end of the year out of fear that the tax break would not be extended.
In some states, short sales have sold for $100,000 less than what the homeowner owed. Hence, a home seller in the 25 percent tax bracket who completed a short sale would have been faced with a $25,000 tax bill if the extension had expired.