Congress did one thing right in their last minute wranglings over the federal budget and their efforts to avoiding falling over the fiscal cliff – they extended the The Mortgage Forgiveness Debt Relief Act and Debt Cancellation through 2013. That means if your mortgage company forgives any indebtedness in the case of a short sale or principal reduction – you will not get taxed on the debt that is cancelled as if it were income. So – even if you get a 1099 C – you can still avoid any negative tax implications. Just make sure that you address your 1099 C with your income tax preparer.