The fiscal cliff agreement reached Tuesday will extend a tax exemption for distressed homeowners. Without the extension of a 2007 law, mortgage debt forgiven in foreclosure, loan modifications or short sales would have been considered taxable income. The Associated Press

Expiring tax exemptions for homeowners facing foreclosure, a relatively uncontroversial response to the foreclosure crisis that had lingered for months on Congress’ to-do list, will be extended in the fiscal cliff deal approved late Tuesday.

Debt canceled through a foreclosure, a short sale or a loan modification on a primary residence was considered taxable income until 2007’s Mortgage Forgiveness Debt Relief Act. Under the fiscal cliff bill passed by Congress and awaiting the president’s signature, that forgiven debt will remain untaxed for another year.

Without an extension, short sales and loan modifications would have come with an increased tax burden on an already struggling homeowner. That would likely have pushed more to fight foreclosure, dragging out the impact of the foreclosure crisis on the housing market.

Don McCredie, a principal broker with Realty Trust Group in Lake Oswego, spent the last days of the 2012 shuttling paperwork for a short sale that closed the day after Christmas. The seller, he said, would have backed out if the increased tax burden took effect.

“If this didn’t close by the end of the year, he wasn’t going to take a chance,” he said. “They seemed really concerned about having to pay taxes on the bank’s losses.”

Meanwhile, despite renewed interest in short sales among both struggling homeowners and banks, fewer have been coming across his desk in recent weeks (though that’s also a seasonally slow period for home sales).

“I would be willing to bet some people are holding off,” he said.

The act now expires Jan. 1, 2014. The relevant bit of legalese:

SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.
(a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.