Mark & Kristin Stampini

This became a public law as of 12/20/2007. H.R. 3648 will provide relief on taxes in certain specified situations. Beginning January 1^st, 2007 lasting until January 1^st, 2010 certain discharges of mortgage indebtedness on a principal residence will be excluded from a tax payer’s income. The amount of indebtedness is limited to $2 million which for most of us will not be a problem. 

This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness they receive. This Act will also increase the incentive for borrowers and lenders to work together to refinance loans and allow families to secure lower mortgage payments without facing higher taxes. When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes.

 H.R. 3648 will also have relevance in situations where there is not a sale, but where the borrower and lender have restructured the loan and, along with other possibilities such as interest rate and/or payment reductions, the loan balance has been reduced. In such cases the debt forgiveness will be applied to a reduction in the borrower’s cost basis in the property.  

This tax exclusion only applies in situations where the debt forgiveness resulted from a situation related to a decline in the value of the property or to the financial condition of the borrower. For example, if you have refinanced your home several times and it’s now worth $100,000 less then you owe on it and your neighbor bought their home one year ago but today their home is also worth $100,000 then what they owe on it and now you both have to sell, if you both are granted a short sale by the lender, then you both will receive mortgage debt forgiveness of $100,000 under the H.R. 3648, the debt forgiveness will not be taxed because it was acquisition debt. 

This relief for struggling homeowners could be troublesome for investors. In order to offset the taxes lost because of this change, the legislation has tightened the requirements for exemption on capital gains from a primary residence. Taxpayers were allowed to exclude up to $250,000 for a single person and $500,000 for a married couple of the gain realized on the sale of a principal resident that was lived in for at least two of the last five years. Investors who now rent their property they once lived in will no longer be eligible for a full exemption of capital gains taxes. Although H.R. 3648 may be undesirable for some investors, it may benefit others, particularly those who buy short sale properties. Struggling homeowners may be more willing to pursue a short sale now that they do not have to pay taxes on their loss.

There are other programs that have been launched to help struggling home owners. FHASecure expands the FHA’s ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments. The Urban Development have assembled the private-sector HOPE NOW alliance. is supporting a toll-free mortgage counseling hotline, 888-995-HOPE, and has developed a plan that could provide assistance to over 1.2 million homeowners. The HOPE NOW plan will help sub prime borrowers who can afford the current, starter rate on a sub prime loan, but would not be able to make the higher payments once the interest rates adjust. These programs won’t solve all the problems out there but it will certainly be of help to may homeowners who are struggling, and that is a good thing.