President Bush has signed The Mortgage Forgiveness Debt Relief Act of 2007. It provides a temporary, three-year change to the tax code to eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. It applies only to primary residences and is capped at $2,000,000.
Said President Bush “Under current law, if the value of your house declines and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as money that can be taxed. And of course, this makes a difficult situation even worse. When you're worried about making your payments, higher taxes are the last thing you need to worry about. So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it's a really good piece of legislation. The provision will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes.”
The Act also makes mortgage insurance premiums tax deductible. According to the National Association of Home Builders president Brian Caltalde "By enabling mortgage insurance premium payments to be deducted, homeownership is made more affordable for thousands of families who now will be able to buy a home without having to resort to more costly sub-prime or predatory alternatives."