The U.S. House of Representatives voted on Thursday to get rid of a tax burden for homeowners who have had a loan forgiven or foreclosed on their home because they were unable to make their mortgage payments. The Mortgage Cancellation Tax Relief Act, H.R. 3648, passed by a vote of 386 to 27. Similar legislation is making its way through the Senate.

The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is currently subject to the tax.

The new rule modifies the application of the exclusion when an individual converts a rental or vacation property to his/her principal residence. Under the new rule, the owner will be required to pay capital gains taxes on the appreciation attributable to the time that the property was used as an investment property. The amount excluded will be a fraction, determined at the time the vacation/rental property is sold.