I’ve written previously on the Mortgage Forgiveness Debt Relief Act of 2007 which the president signed on December 20th, 2007. As we are now in the middle of tax season, I thought a brief review of the important aspects might be helpful.
One major provision temporarily spares homeowners the tax burden associated with canceled mortgage debt. Prior to this law, forgiven or unpaid mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was considered taxable income. The new law, however, waives these taxes from the beginning of 2007 to the end of 2009.
The new law also extends until 2010 the mortgage insurance deductions created by the Tax Relief and Health Care Act of 2006. Designed to protect lenders from defaults and foreclosures, mortgage insurance (commonly referred to as PMI) is required for loans exceeding 80% of the property’s value or sales price. PMI, an alternative to now generally unavailable 80/20 loans, makes it easier for certain borrowers to qualify for a home loan. Under the new law, qualifying taxpayers can treat PMI payments as home mortgage interest, which is tax deductible in most instances.
Finally, the new law broadens the home-sale gain exclusion for surviving spouses. In the past, the combined $500,000 gain exclusion was available only if a husband and wife filed a joint return for the year of sale. For full information, be sure to contact your tax specialist.