Good news.
According to reliable sources, the late night deal to avert the fiscal cliff included an extension of the 2007 Mortgage Forgiveness Debt Relief Act which was to expire at midnight last night. According to the National Association of Realtors, and confirmed by the text in the screen shot of the bill:
Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.
Here is the clause referred to in the quote above:
Mortgage Forgiveness Debt Relief Act Extension
The full text of the American Taxpayer Relief Act of 2012 can be found here and here. I know a number of home owners and colleagues in the industry who were concerned that the law would not be extended or languish in ambiguity until a retroactive extension, neither of which would have been particularly good.
There are details which are best discussed with your CPA and other professional financial adviser, and no broker like myself gives tax advice, so do consult with your accountant or lawyer. If you need a referral to a CPA or attorney familiar with the law, send me and email and I’ll be happy to put you in touch.
Bottom line: The business and tax ramifications of doing short sales did not change from the past 5 years, and if you are in the process of a short sale or considering one, a significant obstacle has been cleared. We can all exhale.
Update: Deal has been approved by both Congress and the Senate, and the President has signed it into Law.
J. Philip Faranda
New York Short Sale Team 
But the House still needs to approve the package so there is no guarantee that it will be extended. It would be a good idea for people to call the Congressional Representatives because if it is not extended the impact could significant.
House Wavers on Cliff Compromise ..
http://online.wsj.com/article/SB10001424127887323320404578215373352793876.html
Alexandra von Bryce, Realtor, CDPE
“Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.”
Completely false. There has always been an insolvency clause in the IRS tax laws. This relief act is not needed. Homeowners who are truly distressed and have no money will not get hit with the tax liability if they can prove to the IRS they are insolvent.
Let’s not sugar coat this. This law has created millions of short sales (some of the homeowners commit massive fraud/hiding money/assets and know the banks won’t dig as deep as the IRS into ever transaction and claim they can’t afford their mortgage). I know personally 5 people in my own neighborhood in Florida who have “short sold” their homes but miraculously come up with 400-500K cash to buy their new home once the short sale was finalized. More distress properties, lower home prices. This relief act has single handedly made the word “short sale” a common household word anyone knows about. Before no one would do a short sale cause the IRS tax liability was a huge deterrent.
And it the law doesn’t distinguish between a homeowner who made a 200K profit in 2005 and put no money down from his profit to buy another home in 2005 and short sales in 2013 vs. a first time homeowner who purchased in 2005 (without any previous profit) and needs to short sale in 2013.
We all know this legislation was poorly written to began with and it really needed to be streamline to help truly distress homeowners who were responsible.
Frank, if you know 5 people who have all committed fraud at that level you should report it. I am aware of the issue with strategic defaults, but that is not something I have encountered in the dozens of short sales I have closed.