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Mortgage Forgiveness Debt Relief Act of 2007

On Thursday, December 20^th, President Bush signed into law a bill passed by Congress: H.R. 3648 – Mortgage Forgiveness Debt Relief Act of 2007. Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed of lieu of foreclosure, was considered taxable income. The new law, however, temporarily waives these taxes for debts forgiven from the beginning of 2007 to the end of 2009.

The Three Major Points are:

1. Elimination of the “phantom tax” on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50k difference as part of a foreclosure, short sale, refinance or loan modification, the borrower was issued a 1099 and had to claim the $50k as income and pay federal income taxes on that amount. The new law eliminates this “phantom tax”, and the forgiven debt is no longer treated as taxable income to the borrower. There are, of course, limits and restrictions. For example, the maximum amount of “forgiven debt” is $2,000,000 for a married couple filing jointly and $1,000,000 for a single person. Because the bill only applies to a “principal residence,” investment properties and second homes are not eligible.

2. The tax deduction for mortgage insurance premiums is now extended until December 31, 2010, instead of expiring at the end of 2007.

3. The capital gains exclusion is now $500,000 instead of $250,000 for an unmarried individual who sells their primary residence within 2 years of the time their spouse has died. This new guideline applies to sales after December 31, 2007, and provides relief for widows and widowers by giving them a 2 year window from the time their spouse has died to sell their home and receive the $500,000 exclusion. Of course, the same rules apply as before, where the individual(s) need to have lived in the home as their primary residence for 2 out of the last 5 years.