Signed into law by President Bush on December 20, 2007, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 (the “2007 Act”), gives some relief to those suffering under a foreclosure and expands the exclusion of capital gains on the sale of a personal residence by a surviving spouse. The highlights of the 2007 Act, as they relate to our industry, are as follows:Signed into law by President Bush on December 20, 2007, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 (the “2007 Act”), gives some relief to those suffering under a foreclosure and expands the exclusion of capital gains on the sale of a personal residence by a surviving spouse. The highlights of the 2007 Act, as they relate to our industry, are as follows:
- 1099-C – Cancellation of Debt: Before the 2007 Act, if an individuals home was foreclosed, and the lender cancelled some of the individuals debt, the individual would receive a 1099-C from the lender and would have to include the amount of the cancelled debt on his/her tax return. For example, if my lender foreclosed upon my house and the lender received $75,000 from the sheriff’s sale, but I actually owed the lender $100,000, the lender would send me a 1099-C for $25,000 and I would have to report the $25,000 on my personal income tax return.
The 2007 Act was passed to give some relief to people in this situation by amending the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Note that this applies to any debt forgiveness by a lender if the loan is for the acquisition of an individual’s principal residence – meaning that the debt forgiveness not only applies to foreclosure situations but also applies if the homeowner refinances an acquisition loan and the first lender forgives debt.
The 2007 Act limits the exclusion amount to $2 million and reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. The 2007 Act details other situations in which the exclusion of income will be disallowed – to see those situations and the full text of the 2007 Act, please go to: http://www.govtrack.us/congress/billtext.xpd?bill=h110-3648
- Extension of Treatment of Mortgage Insurance Premiums as Interest: The 2007 Act extended the date for deducting mortgage insurance premium payments from December 31, 2007 to December 31, 2010.
- Capital Gains Tax Exclusion – Surviving Spouse: The 2007 Act added a provision to Section 121 of the Internal Revenue Code (Exclusion of gain from sale of principal residence) to allow a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements of Section 121 have been met. This new provision applies to sales or exchanges after December 31, 2007.
Additionally there may be more good news on the home front in the near(er) future – when signing the Mortgage Forgiveness Debt Relief Act of 2007, President Bush commended Congress on the steps to address the troubled housing market and then called Congress into further action, stating: “The Congress needs to pass legislation permitting state and local governments to issue tax-exempt bonds for refinancing existing home loans. Congress needs to pass legislation strengthening the independent regulator of government sponsored enterprises like Freddie Mac and Fannie Mae, so we can keep them focused on the mission to expand home ownership. Congress needs, as well, to complete work on responsible legislation modernizing the Federal Housing Administration, so that we can give the FHA the necessary flexibility to help hundreds of thousands of additional families qualify for prime-rate financing.” KEEP THE GOOD NEWS ROLLING.