ST. PETERSBURG — When the year ended, retired air traffic controller Brad Bates and his wife had been resigned to their fate: a tax-bill jump of about $25,000 due to the potential sale of their underwater home.
A crucial tax break for forgiven mortgage debt had expired Dec. 31, meaning they would owe taxes on the money they didn't pay toward their loan, likely pushing the couple into bankruptcy.
But tucked in the New Year's Day deal that dodged the fiscal cliff was a late Christmas present: an extension for the break until the end of 2013.
If the Bates' home, which is now under contract, sells before year's end, the couple will owe nothing extra to Uncle Sam.
"That's terrific," Bates said. "Maybe 2013 is going to be a much better year."
Homeowners facing short sales, reduced loan principals or foreclosures can breathe easier after the 2007 tax break was extended late Tuesday in a bipartisan vote.
The extension will allow homeowners this year to avoid paying taxes on any money scrubbed from their debt to the bank.
Florida short sales in recent months have sold on average for about $103,000 less than what the homeowner owed, according to data firm RealtyTrac. Without an extension, a home seller in a 25 percent tax bracket would have owed $25,725 more to the IRS.
Real estate agents and experts had hoped the tax break, passed in 2007 as the foreclosure crisis worsened, would be extended. But as the clock ticked closer to the deadline, many short sellers scrambled to close their deals out quick or face the consequences.
"My full anticipation was that it was going to get done," said Keller Williams agent Steve Capen. "No one on either party wanted to take responsibility for not extending it."
The relieved debt would have been taxed as income.
The one-year extension will save American taxpayers $1.3 billion, according to the Joint Committee on Taxation.
The fiscal cliff bill, which averted a bundle of steep tax hikes and spending cuts, included several other extensions affecting homeowners. A tax deduction for mortgage insurance premiums for homeowners earning less than $110,000 a year and a tax credit of up to $500 for energy-efficiency improvements will last through 2013.
The debt-relief tax break could face further challenges as budget battles continue in Congress or when its deadline nears later this year.
But in the meantime, agents hope the extension will convince reluctant homeowners to sell their homes without fear of a crippling tax hit.
"It'll be good to get people off the fence," Capen said, "to get moving and get the market corrected."
Drew Harwell can be reached at firstname.lastname@example.org or (727) 893-8252.