U.S. House panel OKs debt forgiveness in foreclosures

An interesting story applies to sellers that "short-sale" their home - that may relieve them of tax penalties...

U.S. House panel OKs debt forgiveness in foreclosures
Foreclosed homeowners won’t have to pay income tax on debt forgiven by a lender under a bill that passed a U.S. House panel yesterday. Should the bill become law, the bill would also extend the tax deduction for PMI and change slightly the rules for shielding $250,000 in capital gains from the sale of a second home.

H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, now goes to the full House for a vote.

Debt forgiveness in foreclosures

Currently, homeowners who lose their homes to foreclosure generally have some mortgage debt forgiven by the lender, but the IRS considers that forgiven debt taxable income, charging extra tax to people who just lost their home. H.R. 3648 would provide a permanent exclusion for any discharge of indebtedness (on or after Jan. 1, 2007) that is secured by a principal residence and incurred in the “acquisition, construction or substantial improvement of the principal residence.”

Long-term extension of the deduction for private mortgage insurance

The bill extends the tax deduction for private mortgage insurance for seven years – through 2014.

Gain on the sale of a principal residence

Taxpayers may exclude up to $250,000 ($500,000 if married filing a joint return) of the gain realized on the sale or exchange of a principal residence. H.R. 3648, however, changes slightly the definition of principle residence when it’s applied to second homes. Under current law, a home qualifies for the exclusion if it’s a taxpayer’s principal residence for at least two of the five years preceding a sale ending on the sale, even if the home was initially purchased as a second home.

Under the bill, the timeline changes. A taxpayer may only use the deduction on a home sale after a home becomes his principal residence. Time spent living in the home does not count toward the two-year minimum until the owner officially declares it his primary place of residence.

Qualification changes for cooperative housing corporations

Under current law, a cooperative housing corporation must follow some specific rules, including a requirement that 80 percent or more of the cooperative housing corporation is earned from the corporation’s tenant-stockholders. H.R. 3648 expands that requirement by providing two alternatives to this rule – one based on square footage and another based on cooperative expenditures.