As I was driving to meet a friend for dinner last Thursday, I heard on the radio that Congress had passed the Mortgage Cancellation Relief Act.  Sure, it is probably odd to get excited about something like that after hours.  But it caught my attention because it is one of those events that will actually change an oppressive policy.  

The tax law currently requires homeowners to pay income tax on amounts forgiven by their mortgage lender or when their home sells in foreclosure for less than their debt.  Being taxed on the amount a person is unable to pay truly adds insult to injury. This tax policy has been in the cross-hairs of criticism for some time. I read that the National Board of Realtors®  has been lobbying for a change in the law since the early 1990’s. With the current national mortgage crisis and many stagnant real estate markets, more homeowners would likely be affected by this unfair tax now than ever.

If passed by the Senate and signed by the President as expected, the new law will exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations. In short, it will repeal the “phantom income tax” for homeowners on their primary residences.

Congress clearly wants to respond to how the mortgage industry meltdown is affecting the public. This is a very practical way to ease one way government has been overbearing. When this law becomes effective, at least the tax law will no longer hit homeowners when they are already down.