House Passes Foreclosure Tax-Break Bill

A few days ago the House quietly passed a bill called the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) that does away with the tax penalties that a homeowner faces when selling a home for less than what it's worth. Currently, the loss is taxed as a gift, because the lender forgives the amount of the loss.

The tax loss will be offset by modifications to the existing home sale exclusion policy, which grants a tax break on the profits of the sale of a home that's served as a primary residence for at least 2 of the past 5 years. The break is currently on the first $250,000 of profit for single filers and $500,000 for married couples.

To make up for the tax loss from HR 3648, the current exemption will be tied to length of use as a primary residence. The details aren't clear yet, but I expect we'll see the exclusionary limits remain unchanged at $250k/$500k with a tiered approach to the length of ownership, beyond 2 years for the full exclusion.

Read the highlights of the new Bill here.

View the text of the Bill here.