Prior to December 20th of 2007, homeowners who faced foreclosure, a deed in lieu of foreclosure, short sale, or similar situation, were subject to being taxed on the amount of “forgiven indebtedness”. H.R.3648:Mortgage Forgiveness Debt Relief Act of 2007, sponsored by Rep Charles Rangel [D-NY] and signed by the President, has been passed which means relief to homeowners who find themselves in those situations. Rep James McCrey [R-LA], in his floor speech Oct 4, 2007 regarding the legislation and the sub-prime situation:

“Mr. Speaker, I rise in support of this legislation, though not without some reservations. I share the concern of my chairman and my colleagues about the sub-prime mortgage crisis.While we are all ultimately responsible for the contracts we sign, there were clearly failures in the market that led people to buy homes larger or more expensive than they could really afford, or to accept mortgage terms that might quickly become unsustainable.The result has been a growing number of foreclosures, which, in turn, puts downward pressure on other home prices. Moreover, when a bank forgives some or all of the mortgage, that cancelled debt is treated as income and is subject to tax. Too many people are learning the hard way about this “kick-’em-when-they’re-down” feature of the tax code.”

This is somewhat good news to those homeowners who have been forced to sell short or lose their home altogether. Clearly there is still alot of debate on who is to blame for the sub-prime mess and while some may not agree with this provision, I feel like it’s appropriate. The measure says that this applies to “…indebtedness incurred to acquire a principal residence.” Investors who got into trouble, are still on the hook as far as I can see.

Click here for the full text version of the bill.

Click here for a summary

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