Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007

On December 20, 2007, President Bush signed into law the new Mortgage Forgiveness Debt Relief Act of 2007, H.R. 3648; Pub. Law 110-142.  That law includes several tax changes relating to real estate transactions.  The first major change pertains to forgiveness of mortgage debt resulting from short sales, foreclosures, etc.  Prior to the new law, any forgiven debt would be taxable as income.  The change now states that any forgiven mortgage debt is excluded from income if:

•-         The property subject to the mortgage is a Principal Residence;

•-         The mortgage indebtedness is related to Acquisition Indebtedness; and

•-         The forgiven indebtedness is NOT related to services performed on behalf of the lender or is directly related to a decline in the value of the residence or to the financial condition of the taxpayer.

The amount excluded from gross income shall be applied to reduce the basis of the principal residence of the taxpayer.

The foregoing requirements would appear to exclude forgiveness of mortgages acquired through refinances and home equity loans or lines of credit obtained after purchasing the property.  Before advising your clients that they will not have to pay income tax on any forgiven mortgage amount, be sure to have your clients consult with an accountant or tax attorney to be sure this law would apply.  Additionally, this change is applicable only for forgiven indebtedness from January 1, 2007 to December 31, 2009 and is limited to $2 million of debt forgiven.

Another change affects homeowners' deductions of private mortgage insurance.  Prior to the new law, effective 2007, homeowners were able to deduct payments of private mortgage insurance on the income tax return.  This deduction was only to have been for 2007, terminating as of December 31, 2007.  The change in the law now extends private mortgage insurance deductions through December 31, 2010.

Additionally, the new law affects a surviving spouse's ability to take the joint capital gains exclusion for property owned when their spouse was alive.  Prior to the new law, a surviving spouse could only take the joint exclusion of $500,000 if the principal residence was sold within one year of the spouse's death.  The new law retains the joint exclusion but extends a surviving spouse's ability to use the exclusion for two years from date of death if the property was used as a principal residence for at least two out of the previous five years prior to the spouse's death.

This is not intended as legal advice .  Any additional detailed questions should be directed to an accountant or a tax attorney.