[Congressional Record Volume 146, Number 59 (Monday, May 15, 2000)]
[Senate]
[Page S3947]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERREY (for himself and Mr. Hatch):
  S. 2555. A bill to amend the Internal Revenue Code of 1986 to exclude 
from gross income of individual taxpayers discharges of indebtedness 
attributable to certain forgiven residential mortgage obligations; to 
the Committee on Finance.


                mortgage cancellation relief act of 2000

  Mr. KERREY. Mr. President, today I am introducing legislation to 
correct an inequity in the tax code which can hurt homeowners who sell 
their homes at a loss. I am delighted to be joined by Senator Hatch in 
introducing this legislation.
  We all know someone who, for whatever reason, has wound up selling 
their home at a loss. In these situations, where the value of a home is 
less than the outstanding loan on that home, a mortgage lender will 
sometimes forgive all or part of the outstanding mortgage balance. 
Under current law, the amount forgiven is counted as taxable income to 
the seller.
  This doesn't make any sense, particularly since gains on a principal 
residence are tax exempt up to $500,000. The legislation we are 
introducing today will fix this problem by exempting taxpayers from 
including in ordinary income mortgage amounts forgiven by the lender on 
a principal residence, provided the proceeds of the home sale won't 
satisfy the qualified outstanding mortgage.
  The legislation we are introducing today is targeted to protect 
against any abuse and we expect the cost to be very low over a 10-year 
period. I urge my colleagues to join us in cosponsoring this 
legislation.
  Mr. HATCH. Mr. President, I stand before the Senate today to urge my 
colleagues to support a bill, the Mortgage Cancellation Act of 2000, 
that I am introducing along with Senator Kerrey. This bill would fix a 
flaw in the tax code that unfairly harms homeowners who sell their home 
at a loss.
  Often, homeowners who must sell their home at a loss are able to 
negotiate with their mortgage lender to forgive all or part of the 
mortgage balance that exceeds the selling price. However, under current 
tax law, the amount forgiven is taxable income to the seller.
  For example, suppose a young family purchased their home for $150,000 
with a $130,000 mortgage, $120,000 of which is still outstanding. Let 
us also assume that there is an economic downturn that has both 
decreased the value of the house to $110,000 and put this family in 
financial distress because the primary wage earner has lost his or her 
job. Because the family is no longer able to meet their mortgage 
payments, they are forced to sell their home for $110,000, $10,000 
below the value of the mortgage, with the condition that the lender 
will forgive this difference. Unfortunately, under current tax law, 
this family will have to recognize this $10,000 difference as taxable 
income at a time when they can least afford it. This is true even 
though the family suffered a $40,000 loss on the sale.
  Mr. President, I find this predicament both ironic and unfair. If 
this same family, under much better circumstances, was able to sell 
their house for $200,000 instead of $110,000, then they would owe 
nothing in tax on the gain under current tax law because gains on a 
principal residence are tax exempt up to $500,000. I believe that this 
discrepancy creates a tax inequity that begs for relief.
  Finally, I want to stress that now is the time to address the 
inequity, while the economy is healthy, instead of waiting for the next 
recession, when this problem will be much more common. Luckily, the 
problem addressed by this bill is not widespread in our country right 
now. However, a few years ago, many families in my home state of Utah 
suffered losses on the necessary sale of their homes, and had to pay 
taxes on the canceled mortgage debt. Families in other areas of our 
nation experienced similar problems.
  So, Mr. President, I urge my colleagues to join with Senator Kerrey 
and me in support of this bill.
                                 ______