Under current law, when a lender forgives some or all of a mortgage debt, the borrower is required to treat the forgiven debt as taxable income, taxed at ordinary rates. In today’s marketplace, declining property values have left some sellers in the position of having to sell their home for less than the outstanding balance. Even though the loss of value occurs through no fault of their own, if the lender forgives the shortfall, that amount is taxable income for sellers. Similarly, an individual in foreclose must pay tax on any mortgage debt amount that the lender cannot recover from the disposition of the property.

The Mortgage Cancellation Tax Relief Act would amend the tax code to exclude debt forgiveness on principal home mortgage from treatment as income. The bill would allow lenders to restructure delinquent mortgages without worrying about the income tax ramifications. In addition, it would permit the use of short sales to avoid foreclosure and keep homes occupied without adding a new tax burden on families that have just lost the primary residence.

HR 1836, was introduced in mid-April by Reps. Robert E. Andrews, D-N.J, and Ron Lewis, R-Ky. It has enjoyed bi-partisan support and is introduced as the House has urged leading banks, mortgage companies and regulators to work out solutions to keep troubled homeowners out of foreclosure.

On May 15, 2007 Ohio Treasurer Codray sent a letter to Ohio’s Congressional delegation urging passage of the bill. He stated: “The current tax system penalizes people who are trying to do the right thing by trying to pay off their mortgages and avoid foreclosure. We want to encourage homeowners who are having trouble paying their mortgage to contact their bank, work out a payment plan, and to be able to stay in their homes. This bill will go a long way toward helping that happen for many people.”

U.S. George Voinovich, R-Ohio stated: “Removing this tax penalty encourages homeowners and lenders to work together voluntarily so that payments are manageable and foreclosure can be avoided. This tax actually penalizes those who are trying to work it out in a responsible manner.”

The bill is currently before the House Ways and Means Committee, Congress’ primary tax legislative body.