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November 27, 2007

Mortgage Cancellation Debt Relief Legislation

Another piece of legislation that REALTORS® have been advocating for to help struggling homeowners is H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. If a homeowner must sell a property due to financial problems or through a foreclosure and is unable to repay the full amount of any outstanding mortgage debt, the lender may forgive some or the entire shortfall (this is known as a “short sale”). When some portion of a debt is forgiven, income tax is imposed on any amount that a lender forgives.

H.R. 3648 would remove taxes from mortgage cancellation relief provided on a mortgage on a primary residence. The tax relief would apply only to the original purchase price, plus personal improvements of a primary residence, and would not cover any amount over the original purchase price if a loan has been refinanced with a “cash out” option.

H.R. 3648 was marked up to cost $2 billion over 10 years. Under the 110th Congress’ Pay As You Go rules, and in order to offset this loss in revenue, H.R. 3648 made changes to corporate estimated tax rates and to rules governing second homes that are converted into primary residences.

H.R. 3648 passed through the House Ways & Means Committee on September 26 by a unanimous voice vote and will now head to the full House for a vote.