State attorneys general have asked Congress to extend tax relief for borrowers who faced a foreclosure or a short sale and were granted mortgage debt forgiveness, HousingWire reported Nov. 20.

The five attorneys general leading the tax relief effort are Pam Bondi of Florida, Martha Coakley of Massachusetts, George Jepsen of Connecticut, Lisa Madigan of Illinois and Catherine Cortez Masto of Nevada.

Congress put tax relief efforts in place in 2007 with passage of the Mortgage Debt Relief Act, which dismissed distressed homeowners’ mortgage debt in cases of foreclosure, short sale or loan modification. The act is scheduled to expire on Dec. 31.

Should Congress fail to extend the act, hundreds of thousands of distressed homeowners could receive a huge tax bill.

In a letter to Congress, the attorneys general, citing data from the Congressional Budget Office, said that if the tax relief for borrowers expired, homeowners could face up to $1.3 billion in tax increases in the next two years, HousingWire reported.

“Unless Congress acts, any debt relief to be provided in 2013 under the national mortgage settlement, as well as other mortgage debt relief programs, will likely be considered taxable income,” Masto told HousingWire.

Coakley, whose home state of Massachusetts has seen mortgage debt relief savings on average of $67,457 per borrower, added, “We urge Congress to ensure families are not hit with an unexpected tax bill when seeking a loan modification.”

An extension of tax relief has been included in the Family and Business Tax Cut Certainty Act of 2012, which has so far passed the Senate Finance Committee — with bipartisan support — HousingWire reported.