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Managing America: Banking and Finance

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Week Ending October 5, 2007

H.R.3648 To amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.

The bill is a response to Americans who got in overheads in the mortgage market through various mechanisms including payment schemes that latter expanded into unaffordable monthly payments.

The bill impacts several areas: forgiving taxes on mortgage debt forgiveness (seen as a revenue gain) while excluding some sales of principal residences from a capital gains tax break, furthering the tax deduction for private mortgage insurance and allowing for cooperative housing corporations to qualify a bit more easily.

When a house is foreclosed on and sold, the difference between the value of a home and the amount still owed on the mortgage can be forgiven and that amount is seen as a revenue gain that is subject to taxes. the bill removes the requirement to pay taxes on that revenue up to $2 million. The bill excludes those debts from gross financial calculations from January 1, 2007 forward.

When an individual or couple sells their principal residence they may exclude from taxes up to $250,000 for an individual and $500,000 for a couple if the property was their principal residence for at least two of the five years before the sale. The bill revises conditions under which that deduction can be taken by a ratio between aggregate periods of uninhabited time to the time the property was used by the taxpayer. The two year qualifying time could be reduced if health factors, change of employment, extended official duty, or other unforeseen circumstances prevailed. If the property was rented, however, that time would reduce the qualifying time.

Some premiums paid for mortgage insurance are deductible. That tax law provision is extended through December 31, 2014.

Cooperative housing, such as condominiums and other tenant-owned housing corporations may deduct real estate taxes and other interests paid to the corporation. The bill sets forth that cooperative housing must show that 80% or more of the corporation’s gross income for a taxable year is derived from tenant-stockholders, that all year round 80% of the corporation’s property is used or available for use by tenant-stockholders for residential purposes or ancillary to residential use, and that 90% or more of expenditures of corporation paid or incurred during the tax year are for acquisition, construction, management, maintenance or care of the corporation’s property for the benefit of the tenants.

Finally, the bill would allow corporations with over $1 billion in assets to shift their revenues and so taxes on their revenues between 2012 and 2013. Corporations would also be expected to pay and increased amount of estimated taxes due between July and September 2012. The tax rate required estimated tax rate during that period will rise from 114.75% to 116.50%.

Sponsor:  Rep. Charles B. Rangel (D-NY-15^th)

Vote: Passed the House386 to 27 RC 948 October 4, 2007. The motion to recommit the bill failed 201 to 212  RC 947

Cost to the taxpayers: “The Joint Committee on Taxation (JCT) estimates that enacting H.R. 3648 would decrease revenues by $179 million in 2008 and increase revenues by $151 million over the 2008-2012 period and by $34 million over the 2008-2017 period. The Congressional Budget Office estimates that enacting the bill would not affect federal spending.”

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