President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).
For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer's principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.
Not sure how I feel about that. I got stuck with a hefty tax bill when I short sold a home a dozen years ago. I learned an important lesson from it and that's enabled me to plan better and weather the current situation more successfully. I think it's certainly a benefit to the people caught in the current downturn but worry that it sends the wrong message and puts a further layer of government intervention into our lives. One columnist recently termed it 'Gambler Mae' in that the government has now interjected itself into easing all our pains - lose at the craps table, write it off. Lose big on a stock tip, don't worry, Uncle Sam to the rescue. What do you think?
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