Many people don’t realize it but one of the stumbling blocks for short sales has been, up until recently, the tax implications. Say you negotiate a successful short sale with your lender. The bank graciously accepts the money you got for your home as satisfaction of the mortgage, even though it’s less than what you owed.

Up until recently, that difference, known as “forgiveness,” was considered by the Internal Revenue Service as income to the seller that is fully taxable. The implications to poor homeowners who already are in enough trouble is obvious: they’ve just had to sell their home at a loss and now are saddled with debt from the toughest collections agency in town!

But according to H.R. 3648, “Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence.” It also “Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent.”

Among a grab bag of added penalties for corporations and some fairly arcane legislation for most citizens, it extends through 2010 the tax deduction for mortgage insurance premiums, and sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations.

Another section of the bill allows members of a qualified volunteer emergency response organization (i.e., an organization that provides firefighting and emergency medical services) an exclusion from gross income for state and local tax benefits and for certain payments for their services.

Certain full-time students who are single parents and their children get a break. They are allowed to live in housing units eligible for the low-income housing tax credit provided that their children are not dependents of another individual (other than a parent of such children).

For surviving spouses, the bill allows them to write off up to $500,000 in gross income from the sale of a principle residence if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements have been met.

Designed to encourage homeowners to pursue short sales rather than walk away from a home and face foreclosure, H.R. 3648 is yet another step in the administration’s attempts to help out both financial institutions and home owners survive today’s damaged mortgage market.