The Mortgage Forgiveness Debt Relief Act of 2007 was approved by the U.S. Congress and President Bush in December. It is aimed at preventing home owners from having to pay taxes on forgiven debt when their homes are refinanced or foreclosed upon. Other measures altering various tax laws are included in this legislation as well. Read on to learn more about what the Mortgage Forgiveness Act entails…

When a home is foreclosed upon or a lending institution forgives part of the debt (this may occur if the home’s value drops and the owner sells it for less than he or she owes on a mortgage), the tax law normally treats the debt home owners no longer owe as “income” and taxes them on it. According to house.gov, the Mortgage Forgiveness Act was introduced in response to the crisis involving subprime mortgages, and it quoted Congressman Rangel as saying that foreclosed-upon home owners shouldn’t have to pay a large amount of taxes. After signing the Mortgage Forgiveness Act into effect, the president called for Congress to take additional housing-related steps with regard to Fannie Mae, Freddie Mac, the Federal Housing Administration, and tax-free bonds to assist property owners in refinancing their mortgages.

However, the Mortgage Forgiveness Act will not permanently remain in effect. As indicated by whitehouse.gov, taxes on forgiven debt are only eliminated for a period of three years. The legislation also incorporates some additional changes which have received less attention. Its text (available on the Library of Congress web site) indicates that the cost of Private Mortgage Insurance (PMI) will continue to be treated the same way as interest by the Internal Revenue Service until the end of 2010; thus, it will remain tax-deductible. It also includes some changes to the tax code with regard to the taxation of emergency personnel, the sale of homes owned by people after their spouses pass away, and fines for businesses which do not file tax returns on time.

Basically, the Mortgage Forgiveness Act will prevent the IRS from penalizing home owners who have been foreclosed upon or had part of their debt forgiven by a bank. This, along with its extension of the tax deduction for PMI, will decrease the burden on home owners during the current subprime mortgage crisis and economic downturn. It will also make it less difficult for people who have lost their homes to recover financially.