It's now the law. Debt discharged on some problematic mortgages is no longer taxable.
By now everybody knows about the double whammy that hits many struggling homeowners. Some folks lost their homes to foreclosure. Others thought they were getting a lucky break by getting their lender to renegotiate the loan and forgive some of the debt. In both cases, under Section 108 of the Internal Revenue Code, the homeowners (or former homeowners) received taxable income in the form of forgiven, or sometimes called canceled, debt.
The newly-enacted Mortgage Forgiveness Debt Relief Act
I'm sympathetic to folks who thought they found the American Dream and then realized they had bought into, using ill-advised subprime mortgages, a housing nightmare.
I'm a little less tolerant, though, of both homeowners and lenders who knew -- and don't kid yourself, they knew -- going into questionable mortgage arrangements that the residence was really just a house of cards waiting to tumble.
But, hey. It's Christmas time and the 2008 presidential election year officially begins in a few days. So why shouldn't politicians hand out gifts, tax and otherwise, all around.
Click here to read the White House's press release about Dubya's signing of H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. The Way and Means Committee also issued a press release on the bill's passage, available here. And click here for the Administration's fact sheet on the new law.
PMI tax relief continued, too: While the Mortgage Forgiveness Debt Relief Act definitely will help folks struggling to make their principal and interest (PI) payments on their homes, the law also affords some tax relief to those who are also making PMI payments.
PMI, or private mortgage insurance, is required by lenders when you can't come up with 20 percent to put down on your house.
The new debt forgiveness law included a provision that extends the deductibility of private mortgage insurance for home buyers through 2010. The break was initially set to expire at the end of this year.
To be eligible for the PMI deduction, you must meet an earnings limit. Homeowners with adjusted gross incomes below $100,000 can deduct 100 percent of their mortgage-insurance premium costs; the deductions phase out on income levels between $100,000 and $109,000.
And the write-off applies to mortgages obtained or refinanced from 2007 through 2010. If you have a prior loan with PMI, those payments remain nondeductible.
White House photo by Eric Draper