[Congressional Record Volume 147, Number 109 (Tuesday, July 31, 2001)]
[Senate]
[Pages S8478-S8480]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

                             By Mr. HATCH:

  S. 1282. 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 mortgages obligations; to 
the Committee on Finance.
  Mr. HATCH. Mr. President, I rise today to introduce the Mortgage 
Cancellation Act of 2001. This bill would fix

[[Page S8479]]

a flaw in the tax code that unfairly harms homeowners who sell their 
home at a loss.
  Today, our Nation has achieved an amazing 67.5 percent rate of 
homeownership, the highest rate in our history. It is notable that in 
recent years, the largest category of first-time homebuyers has been 
comprised of immigrants and minorities. This is a great success story. 
Homeownership is still the most important form of wealth accumulation 
in our society.
  From time to time, however, the value of housing in a whole market 
goes down through no fault of the homeowner. A plant closes, 
environmental degradations are found nearby, a regional economic slump 
hits hard. This happened during the 1980s in the oil patch and in 
Southern California and New England at the beginning of the 1990s. A 
general housing market downturn can be devastating to what is very 
often a family's largest asset. Unfortunately, a loss in value to the 
family home may not be the worst of it. Sometimes when people must sell 
their homes during a downturn, they get a nasty surprise from the tax 
law.
  For example, suppose Keith and Mary Turner purchased a home for 
$120,000 with a five percent down payment and a mortgage of $114,000. 
Four years later, the local housing market experiences a downturn. 
While the market is down, the Turners must sell the home because Keith 
was laid off and has accepted a job in another city. The house sells 
for $105,000. However, the Turners still owe $112,000 on their 
mortgage. They are $7,000 short on what they owe on the mortgage, but 
have no equity and received no cash.
  Often, homeowners who must sell their home at a loss are able to 
negotiate with their mortgage holder 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, taxed at 
ordinary rates.
  In the case of the Turner family, the mortgage holder agreed to 
forgive the $7,000 excess of the mortgage balance over the sales price. 
However, under current law, this means the Turners will have to 
recognize this $7,000 as taxable income at a time when they can least 
afford it. This is true even though the family suffered a $15,000 loss 
on the sale of the home.
  I find this predicament both ironic and unfair. If this same family, 
under better circumstances, had been able to sell their house for 
$150,000 instead of $105,000, 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.
  It is simply unfair to tax people right at the time they have had a 
serious loss and have no cash with which to pay the tax. The bill I 
introduce today, the Mortgage Cancellation Relief Act, will relieve 
this unfair tax burden so that in the case where the lender forgives 
part of the mortgage, there will be no taxable event.
  Who are the people that are most vulnerable to this mortgage 
forgiveness tax dilemma? Unfortunately, people who have a very small 
amount of equity in their homes are most likely to experience this 
problem. Today, about 4.6 million households have low equity in their 
homes. Of those, about 2 million have no equity in their homes, which 
is defined as less than 10 percent of the value of the home. In a 
housing value downturn, these people would be wiped out first if they 
had to sell.
  Sixty-seven percent of these low-equity owners are first-time 
homebuyers, and 26 percent of them have less than $30,000 of annual 
family income. The median value of their homes is $70,000, while the 
median value of all homes nationally is $108,000. More than half of 
these low equity owners live in the South or in the West.
  I want to emphasize that now is the time to correct this inequity. 
Today, the National Association of Realtors reports that there are no 
markets that are in the woeful condition of having homes lose value. 
Still, in our slowing economy, families are vulnerable. Because today's 
real estate market is strong, now is the optimal time to correct this 
fundamental unfairness. The bill applies only to the circumstance in 
which a lender actually forgives some portion of a mortgage debt and is 
not intended to be an insurance policy against economic loss. My bill 
provides safeguards against abuse and will help families at a time when 
they are most in need of relief.
  The estimated revenue effect of this bill is not large. The Joint 
Committee on Taxation last year estimated that this correction would 
result in a loss to the Treasury of only about $27 million over five 
years and $64 million over ten years. Again, it is important to note 
that if we wait to correct this problem until it becomes more 
widespread, and thus more expensive, it will be much more difficult to 
find the necessary offset.
  I hope my colleagues will take a close look at this small, but 
important, bill, and join me in sponsoring it and pushing for its 
inclusion in the next appropriate tax cut bill the Senate considers.
  I ask unanimous consent that a copy of the bill be printed in the 
Record.
  There being no objection, bill was ordered to be printed in the 
Record, as follows:

                                S. 1282

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Mortgage Cancellation Relief 
     Act of 2001''.

     SEC. 2. EXCLUSION FROM GROSS INCOME FOR CERTAIN FORGIVEN 
                   MORTGAGE OBLIGATIONS.

       (a) In General.--Paragraph (1) of section 108(a) of the 
     Internal Revenue Code of 1986 (relating to exclusion from 
     gross income) is amended by striking ``or'' at the end of 
     both subparagraphs (A) and (C), by striking the period at the 
     end of subparagraph (D) and inserting ``, or'', and by 
     inserting after subparagraph (D) the following new 
     subparagraph:
       ``(E) in the case of an individual, the indebtedness 
     discharged is qualified residential indebtedness.''.
       (b) Qualified Residential Indebtedness Shortfall.--Section 
     108 of the Internal Revenue Code of 1986 (relating to 
     discharge of indebtedness) is amended by adding at the end 
     the following new subsection:
       ``(h) Qualified Residential Indebtedness.--
       ``(1) Limitations.--The amount excluded under subparagraph 
     (E) of subsection (a)(1) with respect to any qualified 
     residential indebtedness shall not exceed the excess (if any) 
     of--
       ``(A) the outstanding principal amount of such indebtedness 
     (immediately before the discharge), over
       ``(B) the sum of--
       ``(i) the amount realized from the sale of the real 
     property securing such indebtedness reduced by the cost of 
     such sale, and
       ``(ii) the outstanding principal amount of any other 
     indebtedness secured by such property.
       ``(2) Qualified residential indebtedness.--
       ``(A) In general.--The term `qualified residential 
     indebtedness' means indebtedness which--
       ``(i) was incurred or assumed by the taxpayer in connection 
     with real property used as the principal residence of the 
     taxpayer (within the meaning of section 121) and is secured 
     by such real property,
       ``(ii) is incurred or assumed to acquire, construct, 
     reconstruct, or substantially improve such real property, and
       ``(iii) with respect to which such taxpayer makes an 
     election to have this paragraph apply.
       ``(B) Refinanced indebtedness.--Such term shall include 
     indebtedness resulting from the refinancing of indebtedness 
     under subparagraph (A)(ii), but only to the extent the 
     refinanced indebtedness does not exceed the amount of the 
     indebtedness being refinanced.
       ``(C) Exceptions.--Such term shall not include qualified 
     farm indebtedness or qualified real property business 
     indebtedness.''.
       (c) Conforming Amendments.--
       (1) Paragraph (2) of section 108(a) of the Internal Revenue 
     Code of 1986 is amended--
       (A) in subparagraph (A) by striking ``and (D)'' and 
     inserting ``(D), and (E)'', and
       (B) by amending subparagraph (B) to read as follows:
       ``(B) Insolvency exclusion takes precedence over qualified 
     farm exclusion, qualified real property business exclusion, 
     and qualified residential shortfall exclusion.--Subparagraphs 
     (C), (D), and (E) of paragraph (1) shall not apply to a 
     discharge to the extent the taxpayer is insolvent.''.
       (2) Paragraph (1) of section 108(b) of such Code is amended 
     by striking ``or (C)'' and inserting ``(C), or (E)''.
       (3) Subsection (c) of section 121 of such Code is amended 
     by adding at the end the following new paragraph:
       ``(3) Special rule relating to discharge of indebtedness.--
     The amount of gain which (but for this paragraph) would be 
     excluded from gross income under subsection (a) with respect 
     to a principal residence shall be reduced by the amount 
     excluded from gross income under section 108(a)(1)(E) with 
     respect to such residence.''.

[[Page S8480]]

       (d) Effective Date.--The amendments made by this section 
     shall apply to discharges after the date of the enactment of 
     this Act.
                                 ______