A tax break for people who have lost their homes...paid for by people who have not?

As the mortgage meltdown collides with Washington politics, we’re starting to hear more noise from lawmakers trying to find a way to help people save their homes. In a new bill introduced just the other day, Congress is proposing a tax break for people who have lost their homes. The downside is – it will be paid for largely by people who haven’t.

With constituents facing foreclosure and an election year looming, the pressure’s on Washington lawmakers to give homeowners a helping hand out of the mortgage meltdown. A new bill has just been introduced in Congress (HR 3648) by House Ways and Means Committee Chairman, Charles B. Rangel, D-NY and Jim McCrery, R-La, to provide a tax break to those losing their homes.

You see, when debts get written off or cut down, there’s often a nasty little tax whammy that treats the money you no longer owe as income – and then taxes you on it!

For someone who’s just lost their home, this extra tax is often crushing, both emotionally and financially. The bill introduced by Rangel and McCrery would require any income generated by the discharge of qualified mortgage indebtedness to be excluded from taxpayer’s gross income, and would be applicable for any debt discharges made on or after January 1, 2007.

The Rangel bill is in addition to the proposal made by President Bush a short time ago, where he proposed granting tax relief to homeowners facing foreclosure. He also called on Congress to modernize the Federal Housing Administration (FHA) to help more homeowners qualify for FHA insurance by lowering down-payment requirements, raising loan limits and providing more flexibility in pricing.

Under the Rangel bill, the deduction for private mortgage insurance (PMI) would be extended to amounts paid or accrued after December 31, 2007, but only with respect to contracts entered into after December 31, 2006, and prior to January 1, 2015, according to the Joint Committee on Taxation (JCT) explanation. The PMI provision would allow more people to realize their dreams of owning a home during a time when the market is under stress, Rangel said.

Now to pay for it (because there’s always a cost), Rangel and McCrery are looking at the homeowner gain exclusion of up to $250,000 ($500,000 for married filing jointly) of gain realized on the sale or exchange of a second home converted and used as a principal address for two of the five years. Under the Rangel bill the gain exclusion amount would be tied to the amount of time actually spent living in the home – meaning you may have to stay for more than two years to get the full deduction. According to the JCT, closing this loophole would raise $2.0 billion from 2008 to 2017. Click Here to  keep your eyes on this one to see what happens in Washington. Courtesy of Diane Kennedy, CPA Tax Loopholes.

Kathy Toth and Team: Ann Arbor Area Real Estate Experts

 www.KathyToth.com

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