Last week, the Senate passed the Mortgage Relief Act (MRA). Now it goes back to the House for a vote. Since the Senate made some changes, there likely will be a Conference Committee (members of both the House and Senate) go through it before it gets finally passed. Today, I want to give you an overview of this legislation as initially proposed and the portion that has been voted on and approved by both the House and the Senate (and which will surely be included in the final bill). Tomorrow, I will comment on the new provisions put in by the Senate, as they are significant for a wide range of people.
As originally proposed, the MRA was intended to provide tax relief to people who receive debt forgiveness as a result of foreclosure or renegotiating their loan. There are three primary provisions of this act.
Tax Treatment of Debt Forgiveness: Currently, if a person receives debt relief, the amount of the relief normally is included in their income for tax purposes. Under the MRA, if the debt relief related to their home mortgage, and the mortgage interest on that debt is deductible, then the debt relief IS NOT included in their income for tax purposes.
Deduction for Private Mortgage Insurance (PMI): Currently, PMI is deductible, subject to phase out for adjusted gross income in excess of $100,000. This provision is scheduled to sunset (go away) after December 31, 2007. The MRA extends this deduction through 2014.
Exclusion of Gain on Sale of Residence: Currently, gain on the sale of a personal residence is excluded from Gross Income up to $250,000 for a single individual and $500,000 for a joint return if the property is used as a primary residence for any two of five years prior to the sale. The MRA modifies this provision to tax gain from “nonqualified use.” Under the bill, any time that the property was not used as a primary residence (e.g., rented) prior to the taxpayer moving into the house does not qualify for gain exclusion. This means that if you purchased a property, rented it for three years, moved into it and lived in it for two years, and then sold it, only a part of the gain would be excluded. In this instance, only 40% of the gain could be excluded.
HOWEVER, you do not get punished if you turned your residence into a rental property and then sold it. So, in our example, if you lived in the house for two years, then turned it into a rental property and held it for three years and then sold it, ALL OF THE GAIN would be excludable up to the normal limits.
Stay tuned tomorrow for the important amendments made by the Senate to this legislation.
Warmest regards,
Tom
P.S. – For those of you following my weight loss, I will give you an update on Wednesday.