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The housing market, for the time being, is on slightly firmer ground now that two major tax provisions were extended as part of the fiscal cliff negotiations. One of them, the Mortgage Debt Relief Act, was discussed a few weeks ago here on Your Home. It has now been extended for another year, exempting those who are in a short sale situation or worse, foreclosure, from having to pay federal taxes on the balance of their mortgage.

“The act was passed in 2007, right around the time the mortgage and housing crisis started. It was set up to relieve people that if the lender took a deficiency, say or short sale where they ended up taking less money for the payoff of that loan, it allowed people to not recognize that as income,” loan officer Jim Cardinal said.

The fear was, if the act wasn't extended, that homeowners would choose bankruptcy rather than work out a deal with their lender.

“With this act, you can conceivably get out of your home with a short sale or if there was even a foreclosure and not pay the tax on it. Therefore, maybe you could avoid a bankruptcy situation,” CPA Alexis Meeks said.

It's not as simple as just forgetting about it. There's a little work involved when filing your taxes. However, one form will take care of it.

Meeks said, “You have to report it, but there's a separate form and then it's forgiven and you don't have to pay the tax liability on it.”

Through this past September, borrowers received $6.3 billion in mortgage relief aid and the average loan balance reduction was $150,000.