Some Qualifications and Exclusions of the Tax Forgiveness on Short Sales

The Mortgage Tax Forgiveness Bill Was Signed by the President Yesterday (see the post below this)

The bill:

- Excludes the debt forgiven on a qualified principal residence from the definition of gross income subject to income tax (Sec. 2).

- Reduces the income tax breaks on most gains from the sales of non-primary residences using a formula based on the amount of time that the taxpayer actually lived in the property during the five-year period before the sale (Sec. 5).

The Mortgage Forgiveness Debt Relief Act of 2007 amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred to acquire a principal residence.

Limits to $2 million the excludable amount of such indebtedness.

Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income.

Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.

Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and who are insolvent.