Last Minute Tax Changes

On December 20th, 2007, the President signed the Mortgage Forgiveness Debt Relief Act of 2007 into law, creating headaches for the IRS but some great last-minute tax breaks for many homeowners in 2007.

One major provision temporarily spares homeowners the tax burden associated with canceled mortgage debt. Prior to this law, forgiven or unpaid mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was considered taxable income. The new law, however, waives these taxes from the beginning of 2007 to the end of 2009.

This action could encourage some struggling homeowners to sell their upside down properties and avoid foreclosure.

The new law also extends until 2010 the mortgage insurance deductions created by the Tax Relief and Health Care Act of 2006. Designed to protect lenders from defaults and foreclosures, mortgage insurance (commonly referred to as PMI) is required for loans exceeding 80% of the property's value or sales price. PMI, an alternative to piggyback financing, makes it easier for certain borrowers to qualify for a home loan. Under the new law, qualifying taxpayers can treat PMI payments as home mortgage interest, which is tax deductible in most instances.