Mortgage Forgiveness Debt Relief Act of 2007

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1 Mortgage Forgiveness Debt Relief Act of 2007 H.R Passed by Congress on December 18, 2007 and signed into law as Public Law by the President on December 20, 2007, the Mortgage Forgiveness Debt Relief Act of 2007 provides debt forgiveness relief to many homeowners facing foreclosure, as well as other non-mortgage related tax breaks. Exclusion for Discharge of Debt on Principal Residence Cancellation of debt income and exceptions. TheTaxBook, page 14-10: In general, if a taxpayer owes a debt that is canceled or forgiven, the canceled amount is taxable income. Exceptions to this rule include the following (IRC 108): Debt that is canceled in a title 11 bankruptcy case. Debt that is canceled when the taxpayer is insolvent. Debt that is canceled that is considered as a gift to the borrower. The cancellation of qualified farm debt. The cancellation of qualified real property business debt. The cancellation of a student loan in exchange for public services. An adjustment made to the purchase price after the purchase by the seller is generally treated as a purchase price adjustment that reduces basis. Debt that is canceled as a result of Hurricane Katrina. New law. (IRC 108) Beginning with discharges of indebtedness on or after January 1, 2007 and before January 1, 2010, gross income does not include the cancellation of qualified principal residence indebtedness. For purposes of this rule, the following applies: The exclusion is limited to $2 million of acquisition debt. Acquisition debt has the same meaning as acquisition debt for purposes of the mortgage interest deduction rules, except that the $1 million debt limit is increased to $2 million for purposes of the exclusion rule. Any amount excluded reduces the taxpayer s basis in the residence. A principal residence has the same meaning as that used under Section 121 for purposes of excluding gain on the sale of a principal residence. The exclusion does not apply to debt discharged 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. If a portion of a loan that is discharged is not qualified principal residence indebtedness, the exclusion is limited to the amount discharged that exceeds the amount of the loan that is not qualified principal residence indebtedness. Example: $300,000 mortgage is made up of $200,000 qualified principal residence indebtedness and $100,000 home equity debt used to pay off credit cards and car loans. Assume $250,000 is discharged and no other exceptions under Section 108 apply. The exclusion is limited to $150,000, leaving $100,000 of the debt discharged as taxable.

2 The exclusion for discharge of debt due to insolvency does not apply if the exclusion for discharge of debt on a qualified principal residence applies, unless the taxpayer elects to apply the insolvency exclusion instead. Mortgage Insurance Premiums Deductible as Interest TheTaxBook, page 4-10: For contracts issued on or after January 1, 2007, premiums paid for qualified mortgage indebtedness are treated as deductible mortgage interest. The law was set to expire for amounts paid or accrued after December 31, New law. The new law extends this provision to mortgage insurance premiums paid or accrued on or before December 31, 2010 (for contracts issued on or after January 1, 2007). Volunteer Firefighters and Emergency Medical Responders For tax years beginning after 2007 and before 2011, the law provides new benefits for volunteer firefights and emergency medical responders. Under Section 139B, the following benefits are excluded from gross income: Any qualified state and local tax benefit provided to a member of a qualified volunteer emergency response organization. Any qualified payment to a member of a qualified volunteer emergency response organization. Qualified state and local tax benefit. This term means any reduction or rebate of one of the following taxes that is provided by a state or political division on account of services performed as a member of a qualified volunteer emergency response organization: State and local, and foreign, real property taxes, State and local personal property taxes, or State and local, and foreign, income, war profits, and excess profits taxes. Qualified payment. This term means any payment (whether in the form of a reimbursement or otherwise) that is provided to the taxpayer by a state or political division on account of the performance of services as a member of a qualified volunteer emergency response organization. Qualified payments are limited to up to $30 per month in which the taxpayer performs the services. Qualified volunteer emergency response organization. This term means any volunteer organization under contract to provide firefighting or emergency medical services for persons in the state or political subdivision. Denial of double benefit. Expenses that are otherwise deductible by the taxpayer are allowed to the extent they exceed the amount that is excluded from gross income.

3 Exclusion of Gain on Sale of Principal Residence by a Surviving Spouse TheTaxBook, page Individuals can exclude up to $250,000 of gain on the sale of a principal residence if certain rules under section 121 are met. The $250,000 exclusion is increased to $500,000 in the case of a married couple who file a joint return in the year of sale. New law. For sales or exchanges after December 31, 2007, the $500,000 exclusion will also apply to unmarried individuals whose spouse is deceased on the date of sale provided the sale occurs not later than 2 years after the date of death of the deceased spouse, and the couple would have qualified for the $500,000 exclusion if the sale had occurred immediately before the date of death. [IRC 121(b)(4)] Failure to File a Partnership Return Penalty Modified TheTaxBook, page 20-1 in the Deluxe Edition, and page SB4-1 in the Small Business Edition. Prior to enactment of this new law, the penalty for late filing of a partnership return was $50 per month times the number of partners, up to five months. Exceptions to this rule apply. New law. Effective for returns required to be filed after December 20, 2007, the penalty for late filing of a partnership return is $85 per month times the number of partners, up to 12 months. Limitation on certain disclosures. Effective December 20, 2007, section 6103(e), relating to disclosure to a person having a material interest, is amended by adding at the end the following new paragraph: (10) Limitation on certain disclosures under this subsection In the case of an inspection or disclosure under this subsection relating to the return of a partnership, S corporation, trust, or an estate, the information inspected or disclosed shall not include any supporting schedule, attachment, or list which includes the taxpayer identity information of a person other than the entity making the return or the person conducting the inspection or to whom the disclosure is made. Failure to File S Corporation Return Penalty TheTaxBook, page 19-1 in the Deluxe Edition, and page SB3-1 in the Small Business Edition. In general, late filing penalties only applied to S corporations if tax was due, or the S corporation failed to provide shareholders with Schedule K-1. New law. Effective for returns required to be filed after December 20, 2007, the penalty for late filing of an S corporation return is $85 per month times the number of shareholders, up to 12 months. An exception to the penalty for failing to timely file an S corporation return may apply if there is reasonable cause for the failure.

4 Schedule K-1. The $85 per month per shareholder penalty also applies if the S corporation fails to furnish information to a shareholder on Schedule K-1 in a timely manner. Assessment of penalty. The penalty is assessed against the S corporation. Deficiency procedures not to apply. Sections 6211 through 6216 of the code do not apply to the assessment or collection of this new penalty. Sections 6211 through 6216 deal with the deficiency of income, estate, gift, and certain excise taxes, and the procedures for taking the issue to tax court. Corporation Estimated Tax The Tax Increase Prevention and Reconciliation Act of 2005 contained the following concerning corporation estimated tax payments: 1) In the case of a corporation with assets of $1 billion or more, a) The amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2006 shall be 105% of such amount, b) The amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2012 shall be percent of such amount, c) The amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2013 shall be percent of such amount, and d) The amount of the next required installment after an installment referred to above shall be appropriately reduced to reflect the amount of the increase by reason of the above increase, 2) 20.5% of the amount of any required installment of corporate estimated tax which is otherwise due in September 2010 shall not be due until October 1, 2010, and 3) 27.5% of the amount of any required installment of corporate estimated tax which is otherwise due in September 2011 shall not be due until October 1, The Small Business and Work Opportunity Tax Act of In the case of a corporation with assets of $1 billion or more, the law increased the corporate estimated tax payments due in July, August, and September, 2012, from % to % of the payment otherwise due. The next required payment is reduced accordingly. New law. In the case of a corporation with assets of $1 billion or more, the new law increases the corporate estimated tax payments due in July, August, and September, 2012, from % to % of the payment otherwise due. The next required payment is reduced accordingly.

5 Other Provisions The new law also contains the following provisions: New alternative tests for qualifying as a cooperative housing corporation. Clarification of student housing eligible for the low-income housing credit.