The Mortgage Forgiveness Debt Relief Act, HR 3648, was recently signed into law by President Bush. The bill was originally passed by a strong vote of 386-27 in the House this past October 2007. The House had hoped the bill would cover through 2014 for those who needed it; however, the timeline was shortened to 2010. Bush and his administration wanted the bill to provide temporary assistance, and not a crutch.
The essence of the bill is that over the next 3 years the IRS will not be able to count debt forgiven by mortgage lenders as income. This will allow borrowers who are trying to negotiate short sales or other end results with their lender that may allow a partial or total forgiveness of their debt to not be taxed on the amount forgiven. Another aspect of the bill will allow families who have a household income of $109,000 or less to deduct part of their mortgage insurance premium from their taxable income for the year. Families with a household income of less than $100,000 will be allowed to deduct all of the mortgage insurance premium payments from their taxable income.
Bush hopes that this bill will encourage lenders to work with borrowers to help refinance their loans into mortgage payments their income will allow for and hopefully decrease the number of foreclosures seen in the next few years.
Only time will tell how bills like this may assist our real estate market in healing itself.
Written by Shawn McDonald
3 responses so far ↓
1 Peter Toner // Jan 17, 2008 at 10:26 am
Comments from the the California Association of REALTORS
President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million).
For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.
For a copy of the Mortgage Forgiveness Debt Relief Act of 2007 go to:
http://www.govtrack.us/congress/bill.xpd?bill=h110-3648
2 Shawn McDonald // Jan 30, 2008 at 1:10 pm
A few more important points regarding the Bill:
- The property sold must be considered your “principal residence” in order to qualify.
- The debt being forgiven must be “Qualified Principal Residence Indebtedness.” This means the “debt” being forgiven cannot be from a refinance that you took out more money than you owed in order to consolidate other debts or go on that Hawaii dream vacation.
-The limit you can be forgiven up to is two million dollars.
3 Shawn McDonald // Feb 6, 2008 at 6:01 pm
The Mortgage Forgiveness Debt Relief Act will not assist those who are in default or going into foreclosure. However, if the homeowner is able to claim insolvency there may be some tax relief they can seek from the IRS. For more information go to http://www.IRS.gov and look for form 433F to see if you’re “insolvent”.
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