President Bush signed a bill Thursday that would temporarily change the tax code so that when lenders adjust the terms of a mortgage loan, the forgiven debt will not be treated as taxable income.The measure, H.R. 3648, the Mortgage Forgiveness Debt Relief Act, will allow for up to $2 million on loans secured by a borrower principal residence to be discharged without the amount forgiven being subject to federal income tax. The bill would only cover discharges made between Jan. 1, 2007, and Dec. 31, 2009.
Currently, if the lender forgives a portion of a borrower’s mortgage debt, the tax code treats the amount forgiven as taxable income. This may encourage borrowers to seek foreclosure over restructuring their mortgages with lenders.
Regarding the bill, Treasury Secretary Henry Paulson said that homeowners should not be hit with a tax bill after they restructure their mortgages. “This legislation is one piece of a larger plan the president has put forward to help able homeowners avoid foreclosure, said Paulson. “Preventing avoidable foreclosures will reduce the impact of the housing slowdown on homeowners, our communities, and our economy.”