President and IRS Offer Subprime Mortgage Tax Relief

President Bush today called for a variety of measures to assist homeowners caught up in the subprime mortgage situation, including two tax proposals:

Congress needs to temporarily reform the tax code to help homeowners refinance during this time of housing market stress.  Under current law, if the value of your house declines and your bank forgives a portion of your mortgage, the tax code treats the amount forgiven as taxable income.  The House recently passed this tax relief with bipartisan support, and the Senate should pass relief as soon as possible.

• The Administration has also proposed allowing cities and States to issue tax-exempt mortgage bonds to refinance existing loans, and the President calls on Congress to approve this temporary measure quickly.  Under current law, cities and states can issue tax-exempt bonds to finance new mortgages for first-time homebuyers, and this measure would make it easier for State housing authorities to help troubled borrowers.

Also today, the IRS issued Rev. Proc. 2007-72, 2007-52 I.R.B. ___ (12/24/07), which describes the conditions under which modifications of certain subprime mortgage loans will not be cause the IRS to challenge the tax status of certain securitization vehicles in which the mortgages are pooled.