Attorney General Martha Coakley has urged Congress to extend tax relief for consumers who have mortgage debt canceled or forgiven because of financial hardship or a decline in housing values.

Coakley joined 41 attorneys general in sending a letter to U.S. House and Senate leaders, urging them to extend the exclusion, which has been in effect since 2007 and which will otherwise expire on Dec. 31.

The expiration comes at a time when many homeowners in Massachusetts are benefitting from the $25 billion national settlement agreement with the nation’s five largest loan servicing companies. The second progress report on the national settlement released this week shows Massachusetts homeowners have received $266 million in relief so far, including significant principal reduction. Many other banks across the country also offer mortgage modification and debt relief programs. Without action by Congress, principal reductions and loan modifications would be considered taxable income and could cost taxpayers an estimated $1.3 billion over two years.

"This tax relief is critical for helping struggling homeowners stay in their homes as we work to repair the damage from the foreclosure crisis," Coakley said in a statement. "We urge Congress to ensure families are not hit with an unexpected tax bill when seeking a loan modification."

Under the federal Mortgage Debt Relief Act, in effect since 2007, mortgage debt that is forgiven after a foreclosure or short sale or through a loan modification provided to a homeowner in financial hardship may be excluded from a taxpayer’s calculation of taxable income. This exclusion only applies to mortgage debt forgiven on primary residences, not second homes. An extension is included in the Family and Business Tax Cut Certainty Act of 2012, which recently passed out of the Senate Finance Committee with bipartisan support.