Has this law been passed?
Yes. President Bush signed the bill into law on December 20, 2007. Its official title is H.R. 3648 - Public Law 110-142.
How does it work? The cancellation of mortgage debt rules apply only to a limited number of taxpayers. The provision is best understood with an example.
Assume a family purchased their home for $100,000, with a mortgage of $95,000. Later, they need to sell the home. They find that the value of homes in their area has declined and they can sell for only $89,000. At the time of the sale, the outstanding balance on a mortgage might be, for example, $92,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. In some limited circumstances, a lender might forgive the amount of the balance that exceeds the
purchase price ($3,000 in this example).
Second home examples
Is there precedent for this type of relief? Yes. The Hurricane Katrina relief package enacted in 2005 (H.R. 3768, 109th Congress) provided that individuals who either lost their homes or sustained economic damage to them would not be required to pay tax on forgiven mortgage debt. This relief, however, applied only in the Hurricane Katrina relief zone and was effective only between August 25, 2005 and January 1, 2007.
Will this provision apply to commercial real estate? Current law already provides a similar rule that grants relief to debt-burdened commercial real estate and rental properties. The proposal would grant relief for principal residences sold by their owners or to borrowers who arrange a “workout” with a lender that reduces the outstanding balance of the mortgage. If the provision is enacted, homeowners would be treated the same as owners of commercial and rental property when mortgage debts are forgiven.
What are some situations that might trigger this provision? Historically, residential real estate has almost always appreciated in value. However, in some limited situations, values in some neighborhoods fall, often through no fault of the owners. For example, a major employer might leave an area, a military base could close or environmental problems might emerge. (Areas that have been affected in the past include Texas during the oil downturn of the 80’s, Denver and Phoenix during the early 90’s credit crunch and southern California during the aerospace downturn of the early 90’s.) In other circumstances, a homeowner might be in a situation where they needed to sell in a down market to relocate, because of job loss or because of health reversals. It seems particularly unfair to tax phantom income at a time when a taxpayer is in reduced economic circumstances.
What if a property declines in value, but is not sold? The provision would not apply. The provision applies only at the time of sale or other disposition or when there is a workout with the lender.
Do all lenders forgive mortgage debt when property values decline? No. In states with applicable laws, the lender may require a repayment arrangement, particularly if the borrower has other assets.
What is the revenue effect of the proposal? In 2000, the revenue estimate for an identical bill was a loss of $27 million over 5 years and a loss of $64 million over 10 years. The 2007 version reflects dramatic market changes. The current legislative relief is scored as losing $1.3 billion over 10 years.
H.R. 3648 Public Law 110-142 - General Information and Provisions |
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Consumer Financial Protection Agency in the Works (Oct. 22, 2009)
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