Foreclosure and Short Sale Tax Relief

The U.S. House of Representatives passed the Mortgage Cancellation Tax Relief Act, H.R. 3648 by a vote of 386 to 27. A similar bill is making its way through the Senate, and President Bush will hopefully sign it into law. Under the current tax code, any debt forgiven after a mortgage is foreclosed or renegotiated is considered income for tax purposes. The measure would eliminate having to pay that tax when the lender forgives or cancels part of your mortgage debt from a "short sale" or foreclosure. The legislation would be retroactive to January 1, to help those who lost their homes to foreclosure earlier this year. To offset the loss of tax revenue, it will become harder to avoid capital gains taxes on the profit from the sale of a vacation or second home.

"It is just not right or fair that families struggling through a foreclosure would then face a tax bill in addition to losing their homes when they have seen no increase in their net worth. This bill rights that wrong and provides tax relief to millions of American families," said Ways and Means Committee Chairman Charles B. Rangel (D-NY), author of the bill.

In addition, the new legislation would extend the tax deduction for mortgage insurance through 2014.