The U.S. Senate has approved S.B.1394, the Mortgage Cancellation Relief Act, which will provide a temporary, three-year change to the tax code to eliminate any taxes homeowners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law will cap untaxable forgiven debt at $2 million and apply only to principal residences.
According to the National Association of Homebuilders (NAHB), which supports the bill, this measure encourages market-based restructuring between lenders and home owners and discourages foreclosures.
S.B.1394 also includes a provision that extends the deductibility of mortgage insurance for three more years. Mortgage insurance is especially critical for low- and moderate-income first-time home buyers, many of whom may not qualify for a market-rate mortgage, NAHB points out.
Congress made the cost of mortgage insurance tax deductible for the first time in December 2006 for transactions closed in 2007, explains The PMI Group, a provider of residential mortgage insurance. Borrowers with adjusted gross incomes below $100,000 were able to deduct 100% of their mortgage insurance premiums paid between Jan. 1 and Dec. 31, 2007. The new extension passed extends this benefit through 2010. Deductions are phased out at 10% increments for borrowers with adjusted gross incomes between $100,000 and $109,000.
‘On average, this annual tax break amounts to $350 per taxpayer. That's cash in the pockets of hardworking homeowners,’ notes Kevin Schneider, president of the U.S. mortgage insurance business for Genworth Financial Inc., which also supports the legislation.