Congress just started considering proposals to renew tax relief for homeowners who avoid foreclosure through short sales, but its slow movement could zing the short sale market, at least in the near term.

Sellers considering a short sale typically owe more than what their home is worth, and lenders agree to forgive a sizable chunk of their original loan. The property is then sold for a negotiated price acceptable to the buyer, seller and lender.

While sellers still lose the home, their credit score takes less of a hit through a short sale than a foreclosure. However, that’s not necessarily a great deal if Congress ends short sale tax forgiveness. With tax forgiveness, the seller doesn’t pay any income taxes on the amount of money forgiven by the lender. Without tax forgiveness, that money is considered income and taxed accordingly, meaning a short seller that has, for example, a $50,000 debt forgiven could find himself paying significant taxes on that “gift” money he never actually received.

As a result, current short sale candidates are holding back, and they’ll keep biding their time until Congress extends tax forgiveness – and that’s assuming they actually do. In the meantime, fewer homeowners will consider a short sale, and some homes will sit on the sidelines longer as the foreclosure process continues.

Investors that typically purchase and flip these properties, in turn, will also hesitate, according to Tom Zeeb of the National Real Estate Investors Association.

“It’s hard to want to move ahead and help people using this certain technique when you don’t know if it is going to viable because you don’t have stability in the law,” he says.

Housing lobbyist John Grant agreed, noting that when Congress procrastinates on the issue or extends the bill retroactively, investors and homeowners feel uncertain. “Timing is important with this bill because the work can’t continue until the bill actually passes,” he says, adding that the industry wants lawmakers to approve a permanent exemption, or at least extend it over two-year periods instead of one.

“Retroactively (extending the bill to cover previous short sales) doesn’t do any good,” says Grant.