Homeowners with two homes could foot bill for foreclosure victims

The House Ways and Means Committee has approved a bill designed to provide aid to struggling homeowners who are in debt over their heads and facing foreclosure on their homes. The bill provides tax relief for homeowners whose mortgage debt is forgiven. Currently, forgiven debt is considered to be taxable income. The House bill provides for a three year moratorium on such taxation.

To make up for the amounts the government expects to lose by not being able to tax mortgage debt forgiveness, the House legislation proposes restricting tax breaks currently available to owners of second homes.

Current law provides for owners of second homes to take advantage of the $250,000 exclusion from tax ($500,000 for married taxpayers) for the gain on the sale of a home. The second home can qualify for the exclusion as long as the taxpayer lived in the home for two of the previous five years.

Under the new rule being considered in the House, the exclusion must be prorated based how many years the home was used as a principal residence in comparison to all the years the home is owned. Opposing the legislation, Rep. Sam Johnson (R-TX) referred to the tax as a "luxury tax on retirement homes," according to a report in The Wall Street Journal.

Legislation pending in the Senate also provides [1] for a tax break for foreclosure victims, but does not reduce tax benefits for other homeowners.