Foreclosure Debt-Forgiveness Bill Passes the U.S. House of Representatives
By Foreclosure Fighter Staff Writer
Did you know that homeowners who have part of their debt forgiven during a home foreclosure sale may actually get taxed for that remaining balance?
For example, imagine that you had a $140,000 mortgage that you were delinquent on. Let's say that your home was sold in foreclosure for $100,000.
While that $40,000 may be forgiven by lenders, it can also be considered as income and be subject to tax.
With that said, the House Ways and Means Committee has recently approved a bill that would not tax homeowners on this phantom income, being $40,000 in the above example. In fact, the U.S. House of Representatives pledged full support for H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, on October 4th. The bill passed in the House by a 386 to 27 vote.
Originally, George W. Bush was planning on shielding homeowners from this debt-forgiveness tax for three years; the House bill would rather make this change permanent.
Both Bush and the House Ways and Means Committee had proposed such legislation as a reaction to the current mortgage foreclosure crisis in the United States. It had been estimated that Bush's debt-forgiveness proposal would save homeowners approximately $650 million in the next three years.
However, in order to offset this deduction in revenue, this legislation would tighten the tax code's treatment of second homes converted to principal residences. Current law allows homeowners to convert a second home into a principal residence for tax purposes if they had lived in it for two of the last five years.
In other words, a single homeowner could exclude up to $250,000 in profit from the sale of a primary residence under this law while married couples could exclude $500,000.
With that said, the proposed law would exclude only the profit that is attributable to the time period in which the home was considered the person's primary residence from being taxed.
For some members of the House of Representatives, this aspect of the legislation was problematic in that they felt that it would be unfair to people who had purchased a second home with the intention of it eventually becoming a retirement home.
Committee member Sam Johnson (R-TX) specifically described this provision as being a "luxury tax on retirement homes."
According to the U.S. Census Bureau, about one in 20 households in the U.S. owns a second home.
While this legislation has passed the U.S. House of Representatives, a similar version is currently in front of the Senate.
Be sure to visit Foreclosure-Fighter for the latest updates on this legislation. Simply visit our "New Foreclosure Laws" page for the latest news on this and all other pieces of foreclosure-fighting legislation.