Congress has passed legislation that limit will provide a temporary, three-year change to the tax code to eliminate any taxes home owners may face if a lender forgives a portion of outstanding mortgage debt — whether a deficiency in foreclosure, or a loan modification. The House on late Tuesday approved Senate-led revisions to HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, which essentially limited the tax relief measures to a three-year period. The original House version of the bill would have established a permenant exemption on forgiven debt, something the Bush administration opposed. The changes to Section 108 of the Internal Revenue Code will cap untaxable forgiven debt at $2 million and apply only to principal residences. The legislation passed by Congress also includes a provision that extends the deductibility of mortgage insurance for three more years, something that mortgage insurers The PMI Group, Inc. and Triad Guaranty Inc. were quick to praise. Borrowers with adjusted gross incomes below $100,000 can currently deduct 100 percent of their mortgage insurance premium costs, while the deductions phase out on income levels between $100,000 and $109,000. President Bush is expected to sign the legislation into law before the end of the year, according to most media reports.

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