If a lender reduces a homeowner’s principal — via a short sale or write-down, for example — the homeowner would normally have to pay income tax on the amount. But Congress passed what’s called “mortgage cancellation tax relief,” so they don’t have to.

Unfortunately, the law that exempts people from paying those taxes will expire on December 31. That means if you have a seller working on a short sale, and that sale isn’t finished till next year, he’s going to have to pay income tax on the amount that was “forgiven.”

Unless, that is, Congress extends the law.

Ergo, an NAR Call for Action: Make sure Congress extends mortgage cancellation tax relief into 2013. Go to the Realtor Action Center (just click the link in the preceding sentence) and you can send a message to your representatives lickedy-split.

And if you want some more details, click here for a thorough explanation from NAR on the topic (PDF).