New tax breaks provide relief to homeowners

From the Review Journal:

Homeowners found three attractive tax breaks among their holiday presents, thanks to the federal Mortgage Forgiveness Debt Relief Act of 2007, which was enacted in December.

The first tax break concerns forgiveness of debt, which occurs when a lender forgoes repayment of principal and/or interest the borrower owes.

Typically, discharged debt is considered ordinary income to the borrower for income tax purposes.

The new law allows taxpayers to exclude this amount and thus escape the tax liability.

"When you're worried about making your payments, higher taxes are the last thing you need to worry about.

"So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive," President Bush said in his remarks upon signing the law.

Three new tax breaks:

1. Homeowners who experience a foreclosure, short sale, deed in lieu of foreclosure or loan modification may be able to exclude lender-forgiven mortgage debt from taxable ordinary income.

2. Homeowners may be able to deduct the cost of mortgage insurance.

3. A homeowner whose spouse has died may be allowed up to two years to exclude $500,000 of profit from the sale of a principal residence from capital gains tax.