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Mortgage Forgiveness Debt Relief
Act of 2007
Late on Dec. 18, the House of Representatives approved by voice vote the Senate-passed version of H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." Thus, the Act is cleared for the President's signature. The centerpiece of the Mortgage Relief Act is a limited exclusion for discharged home mortgage debt. However, the Act includes a wide range of provisions not connected to mortgage forgiveness relief, such as: a liberalized exclusion rule for home sales by surviving spouses; an extension of the deduction for mortgage insurance; a limited exclusion for qualifying state or local rebates or payments to firefighters and other emergency responders; and a modification of the qualification tests for cooperative housing corporations. Additionally, there's a stiffened penalty for failure to timely file partnership returns, a new penalty for failure to file S corporation returns, and higher estimated tax installments for large corporations in 2012.
Home Mortgage Debt Forgiveness Relief
Unless a specific exception applies, income realized by a debtor from the discharge of indebtedness is included in his gross income. Under pre-Mortgage Relief Act law, exceptions applied under Code Sec. 61(a)(12) and Code Sec. 108 for debtors in Title 11 bankruptcy cases, insolvent debtors, certain student loans, certain farm indebtedness, and certain real property business indebtedness. Generally, the discharge of indebtedness amount equals the difference between the adjusted issue price of the debt being cancelled and the amount used to satisfy the debt. Taxpayers reduce certain tax attributes, including basis in property, by the amount of excluded discharged debt.
Under Code Sec. 163(h)(3), taxpayers may claim itemized deductions for qualified residence interest-interest on up to: (a) $1,000,000 ($500,000 for married individuals filing separately) of acquisition indebtedness and (b) $100,000 of home-equity debt.
New law. The Mortgage Relief Act, effective for indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, the Mortgage Relief Act provides that gross income doesn't include any discharge of qualified principal residence indebtedness. (Code Sec. 108(a)(1)(E), as amended by Act § 2(a)) Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer's principal residence, but with a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2), as amended by Act § 2(b)) "Principal residence" has the same meaning as under the homesal6 exclusion rules of Code Sec. 121. (Code Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual's principal residence that is secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. (Joint Committee on Taxation JCX-86-07)
The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. (Code Sec. 108(h)(1))
Observation: The mortgage forgiveness exclusion only applies with respect to a taxpayer's principal residence. Thus, while interest for a taxpayer's vacation home may be deductible, debt forgiven with respect to a taxpayer's vacation home isn't excludible.
If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness. (Code Sec. 108(h)(4))
The exclusion doesn't apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2), as amended by Act § 2(c))
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Roger Portaro
REALTOR® & Mortgage Consultant
ASP, e-PRO®, ABRA, TRC, CDPE
(954)-275-3100 |
9000 Sheridan St. Pembroke Pines, FL. 33024
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