Mortgage Debt Forgiveness Bill Sails Through House
NAHB-supported legislation to help ease the credit crunch situation was overwhelmingly approved by the House of Representatives on Oct. 4 in the form of a bill that eliminates taxes on forgiven mortgage debt when banks renegotiate the terms of a home loan. This change in tax law, which would cap untaxable forgiven debt at $2 million and apply only to principal residences, will play a central role in helping American families avoid foreclosure and stay in their homes. The legislation, which passed, 386-27, is needed because existing rules under Sec. 108 of the Internal Revenue Code impel many struggling home owners to seek foreclosure over restructuring their loan with lenders due to the fact that forgiven mortgage debt can be taxed as ordinary income. H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, would remove this tax burden on mortgage indebtedness, encourage market-based restructuring between lenders and home owners, and discourage foreclosures. It's also in keeping with one of the key policy provisions approved at NAHB's Fall Board of Directors Meeting to address the mortgage credit crunch.
The same bill also includes an NAHB-supported provision that extends the deductibility of mortgage insurance, thereby making homeownership more affordable to thousands of additional families who would otherwise have to resort to more costly subprime or predatory alternatives. The current deduction, which is set to expire on Dec. 31, would be extended through 2014 under this legislation.
To cover the estimated $2 billion 10-year cost of the overall bill, it also includes a provision that would change the tax laws affecting second homes that are converted to primary residences. NAHB worked closely with members of the House Ways and Means Committee to minimize the negative impacts of this provision as much as possible – for example, we pushed for a "grandfather" clause that allows most existing second-home owners to live under the old rules.
In the end, NAHB Senior Officers and members of our Taxation Subcommittee and Federal Government Affairs Committee analyzed the legislation in depth, concluding that it was structured in such a way that the huge benefit on debt forgiveness and the extension for the deductibility of mortgage insurance outweighed the tax changes for second homes. See the Oct. 8 edition of NBN Online for details and specific examples of how the bill would affect second-home owners, or contact Rob Dietz (1-800-368-5242, x8285) or Greg Brown (x8421) for more information. To read the legislation, click here and type H.R. 3648 in the box in the center screen.
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