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Mortgage Debt Relief Extended Through 2013

The Mortgage Forgiveness Debt Relief Act of 2007 has been extended for another year, until the end of 2013.

Homeowners facing foreclosure won't have to worry about an extra-large tax bill after losing their house or getting a loan modification. At least not for another year.

Forgiven debt could add thousands of dollars to an already struggling homeowner's tax bill. That might have turned some off to seeking an alternative, potentially dragging out the foreclosure only to end up with a higher tax liability regardless.

"It would have definitely discouraged people from trying to seek help from their servicers," said Kevin Sheehan, a housing counselor with Hacienda Community Development Corp. "Obviously that would be very harmful."

Through the past year, homeowners have increasingly avoided foreclosure through loan modifications and short sales. The shift is driven in large part by renewed energy in the housing market, as well as a multi-state mortgage servicing settlement that required banks to direct more customers toward foreclosure alternatives.

The act now expires Jan. 1, 2014, along with some of the government programs that encourage loan modifications and short sales. But that just sets Congress up to face another foreclosure cliff.

"Based on the number of underwater borrowers out there, we have at least a couple of years of elevated short sales that are very likely to happen," Blomquist said. "It probably will need to be extended again at the end of this year to accommodate those folks."

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.

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