It appears that the Mortgage Debt Relief Act of 2007 will be extended for one year. Usually cancelled debt is considered income, but a provision of the Debt Relief Act allowed borrowers "to exclude certain cancelled debt on [a] principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." (excerpt from IRS).
Here is the text from H.R.8:
SEC. 202. EXTENSION OF EXCLUSION FROM GROSS INCOME OF DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.This is helpful for foreclosures, mortgage modifications, and for short sales (so the seller can sell the house for less than is owed, and not have to pay taxes on the debt forgiveness). This provision had wide bipartisan support and was expected to be included.
(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.