The measure passed the full House 386 to 27. Similar legislation is pending before the US Senate.

Under current law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in tax liability for individuals and families.

The House bill, written by Ways and Means Committee Chairman Charles B. Rangel (D-NY), would provide tax relief to families by permanently excluding debt forgiven under these circumstances from tax liability. It is estimated that two million American families could lose their homes to foreclosure due to rising interest rates in the current housing market crisis.

"I am happy that Congress came together to give bipartisan support for this common sense bill to help alleviate the pressure American families are feeling due to the subprime mortgage crisis," said Rangel. "It is just not right or fair that families struggling through a foreclosure would then face a tax bill in addition to losing their homes when they have seen no increase in their net worth. This bill rights that wrong and provides tax relief to millions of American families."

The bill would also help would-be homeowners secure their investments and avoid high interest, "piggy-back" loans for down payments, through a long-term extension of the tax deduction for mortgage insurance, while also easing restrictions for qualifying as housing cooperative corporations. Finally, the bipartisan bill would tighten the requirements taxpayers must meet to exclude gain from the sale of certain homes that have been used as a vacation home or rental property.

The bill has received strong support from the housing and mortgage industries, including the National Association of Realtors, Mortgage Bankers Association and National Association of Homebuilders.

“Congress made a good decision today that will affect many Americans who find themselves in a truly bad situation,” said NAR President Pat V. Combs, vice president of Coldwell Banker-AJS-Schmidt. “Changing the IRS code is an issue of fundamental fairness. It would relieve a tax burden at a time when an individual or family has experienced a true economic loss arising from the sale or loss of their home. These families are already in financial distress and are most likely unable to pay additional taxes.”

John M. Robbins, CMB, Chairman of the Mortgage Bankers Association, also commended the House of Representatives for passing the legislation.

“This bill is of critical importance to many current and prospective homebuyers during this time when the home finance market is enduring significant disruptions. Extending the deduction for mortgage insurance premiums will lower the cost of a mortgage for many low and moderate income borrowers, making the American dream of homeownership more affordable and more attainable," he stated.

"For those borrowers who have worked through a troubled loan with their lender, they should not have to face a tax bill on the phantom income that results from debt forgiveness. I hope the Senate recognizes the importance of this legislation and moves quickly to get it to the President’s desk," Robbins concluded.