In this week’s agreement to avert the fiscal cliff, a major component to the housing market’s revival actually survived.

The last-hour vote in Congress included a provision that extends the Mortgage Forgiveness Debt Relief Act through 2013. This brings back the popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction.

The debt relief act, which was scheduled to expire at the end of 2012, waives forgiveness of mortgage debt from being counted as taxable income by the Internal Revenue Service.

Struggling homeowners who are considering a short sale or loan modification will be eligible for tax relief through Dec. 31 under the act passed in 2007 and originally scheduled to expire in 2009.

According to a research report from Isaac Boltansky with Compass Point Research & Trading, “The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual mortgage insurance premiums.”

“Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private mortgage insurance as well as mortgage insurance provided by the FHA, the VA, and the Rural Housing Service. In 2009, about 3.6 million taxpayers claimed the mortgage insurance deduction,” the research firm added.

The bottom line is: majority of homeowners who sell a primary residence via short sale this year will not have to pay any taxes on any forgiven debt. This applies mainly to short sales of homes, or lender-approved sales for less than the principal mortgage balance. For example, if your underwater home sells for $100,000 less than what you owe on your mortgage, you cannot be taxed on that amount.

The maximum amount that can be treated as qualified principal mortgage debt under the act is $2 million, or $1 million if married filing separately. Second mortgages are eligible if they were used for home improvements.

This tax break has only been extended for another year, so if you are considering a short sale, better if you get counselling immediately.

If you need help or professional advice from a Certified Distressed Property Expert, feel free to contact Margie McIntyre at 775-850-3165 or email her at Margie@margiemcintyre.com.