Mortgage Debt Relief Equals Big Tax Bill?

The Washington Post reports that many homeowners who received principal write-downs as part of national efforts to blunt the harsh effects of the housing crisis, and thereby avoid additional foreclosures, are now facing sizable income tax bills. Although the Senate Finance Committee recently approved a two-year reauthorization of the Mortgage Forgiveness Debt Relief Act, commentators report that it may get held up in the House of Representatives. Not a good sign for the continued recovery of the housing sector: 

Struggling homeowners across the country could face significant new tax bills if they receive mortgage relief from their banks, a prospect that threatens to slow the housing recovery and put further strain on distressed borrowers. The collapse of the housing market and plunging home prices left millions of people stuckowing more on their mortgages than their homes were worth. Some have worked with their banks to reduce the loan amount to avoid foreclosure or enable a sale. In 2007, Congress adopted a law that spared those homeowners from being taxed on the amount of the loan that was forgiven. But that tax break expired in December, and now the forgiven debt can be counted as income by the IRS. Housing advocates worry that the lapse could scare homeowners away from making a deal with their bank, which could disrupt efforts to reduce foreclosures and harm borrowers who were just getting back on their feet.