If the Mortgage Forgiveness Debt Relief Act expires, all of this could change.

FORBES: As Fiscal Cliff Looms, Here's The Expiring Tax Break That Will Hurt Housing Most

Because the exceptions to cancellation of debt income are narrow, Congress enacted the Mortgage Forgiveness Debt Relief Act in 2007.

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With the extension of the Mortgage Forgiveness Debt Relief Act, the short sale surge is likely to continue in 2013.

FORBES: Worst Of Foreclosure Crisis Is Over But Problems Remain

The environment for short-sellers is better, thanks to the Mortgage Forgiveness Debt Relief Act, passed last month, and enacted on Jan. 1, 2008.

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All of that said, the Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude from income from the discharge of debt on their principal residence.

FORBES: You Are Not Alone: R. Kelly Joins Taxpayers Who Have Lost Homes Due To Foreclosure

Established in 2007 with the onslaught of the foreclosure crisis, the Mortgage Forgiveness Debt Relief Act grants distressed homeowners an exemption from paying federal taxes on forgiven mortgage principals.

FORBES: As Fiscal Cliff Looms, Here's The Expiring Tax Break That Will Hurt Housing Most