March 2008

New Tax Breaks Deliver Foreclosure Relief to Troubled Homeowners

On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (“The Act”) granting taxpayers a three-year exclusion of mortgage debt forgiveness from taxable income.

The Act excludes from taxable income for a three-year period from January 1, 2007 to December 31, 2009 mortgage loan discharges of up to $2 million secured by the taxpayer’s principal residence and incurred in the acquisition, construction, or substantial improvement of the taxpayer’s principal residence. Prior to this legislation, any amount of mortgage debt cancelled or forgiven by a lender was included in the borrower’s taxable income.

In addition to foreclosure debt, The Act also excludes from taxable income debt forgiveness resulting from mortgage workouts and renegotiations related to the tax payer’s principal residence, in which the mortgage terms are changed to reduce a homeowner’s monthly payment, as well as some refinancing of mortgage debt.

Moreover, The Act includes additional real estate-related tax benefits, including an extension of the mortgage insurance premium deduction and an expansion of the time period during which a surviving spouse is allowed to use the higher joint-filer home sale exclusion.

Mortgage Insurance Deduction – The Act includes a three-year extension of the mortgage insurance premium deduction through December 31, 2010. Originally enacted under the Tax Relief and Health Care Act of 2006, this extension applies only to contracts entered into after December 31, 2006 or prior to January 1, 2011. The deduction is phased out at 10 percent for each $1,000 by which the taxpayer’s Adjusted Gross Income (AGI) exceeds $100,000.

Surviving Spouse Home Sale Exclusion – Beginning January 1, 2008, The Act expands the time period in which a widowed spouse may use the higher joint-filer $500,000 home sale gain exclusion (as opposed to the single-filer $250,000 exclusion) for two years following the date on which the individual’s spouse died. Prior to this change, a surviving spouse could only file jointly with the deceased spouse’s estate for the tax year in which the spouse died.

It’s important to note that this new exclusion only applies to an unmarried taxpayer whose spouse is deceased on the date of sale of the principal residence. Thus, if a taxpayer remarries and sells the home within two years after the date of death of the taxpayer’s previous spouse, the taxpayer would NOT be entitled to the $500,000 maximum exclusion.

Additional Tax Changes – The Act also contains a few other tax law changes, including an exemption from income of amounts that emergency medical responders and firefighters receive from qualified state and local tax breaks, a clarification the low-income housing credit as it applies to student housing, and a clarification of the definition of cooperative housing corporations.

Contact the tax specialists at Cherry, Bekaert & Holland today to learn more about what you or your business can do to take full advantage of these provisions to maximize your tax savings for 2007 as well as future years.

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