President Bush signed the Mortgage Forgiveness Debt Relief Act into law on December 20, 2007. Here's a summary of the bill's main provisions.
Income from Discharge of Indebtedness on Principal Residence
Effective January 1, 2007 through December 31, 2009. Under this provision the discharge of qualified principal residence indebtedness is excluded from gross income. For purposes of the exclusion, qualified principal residence indebtedness is acquisition indebtedness (to buy, build or improve the residence) up to $2 million ($1 million for Married Filing Separately). The home must be owned and used as a principal residence. The basis of the home must be reduced (but not below zero) by any debt forgiveness excluded under this provision.
If only a portion of the loan discharged is qualified indebtedness, the exclusion applies only to the amount of debt discharged that exceeds the amount of the loan that exceeds the nonqualified indebtedness.
This provision does not apply to discharge of indebtedness on account of services performed for the lender. Also, an insolvent taxpayer must use the principal residence exclusion instead of the insolvency exception, unless the taxpayer makes an election to apply the insolvency exception instead of the exclusion provision.
Exclusion of Sale of Residence Gain for Surviving Spouses
This provision is effective for sales and exchanges after December 31, 2007. For sales within 2 years of a spouse's death, the capital gain exclusion is increased to $500,000 if the surviving spouse has not remarried and the ownership and use tests were met by both taxpayers immediately before the date of death.
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