Good news. The Senate Finance Committee has passed a two-year retroactive extension of tax relief for households who’ve had mortgage debt forgiven by a lender as part of a short sale or loan modification.

The legislation still needs to be passed by the full Senate and also by the House.

The issue has been one of NAR’s top legislative priorities since 2007, when the association worked with lawmakers to enact the relief into law and also later to encourage them to extend the relief in 2008 and 2012.  The relief expired at the end of last year, and unless the full Senate and House approve the extension, households will face the prospect that when they file their returns next year, they’ll pay tax on so-called phantom income, which is the amount of debt forgiven. Absent the provision, the tax law provides that such forgiven debt is income.

Some 350,000 households could be affected by the tax if relief isn’t extended, because that’s the number of households who sold their house last year as a short sale.   

The legislation passed by the committee also extends the 15-year cost recovery for qualified leasehold improvements and a provision that lets taxpayers expense certain qualified real property. The bill also extends the deduction for energy efficient commercial buildings.

Watch this 3-minute video with NAR President Steve Brown on the need for continuing relief NAR-backed Mortgage Debt Relief Clears Committee | Realtor Magazine.