I 

109TH CONGRESS 

1ST SESSION H. R. 3458

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. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 27, 2005

Mr. ANDREWS (for himself and Mr. FOLEY) introduced the following bill; 

which was referred to the Committee on Ways and Means 

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Mortgage Cancellation 

5 Relief Act of 2005’’. 
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1 SEC. 2. EXCLUSION FROM GROSS INCOME FOR CERTAIN 

2 FORGIVEN MORTGAGE OBLIGATIONS. 

3 (a) IN GENERAL.—Paragraph (1) of section 108(a) 

4 of the Internal Revenue Code of 1986 (relating to exclu5 sion from gross income) is amended by striking ‘‘or’’ at 

6 the end of both subparagraphs (A) and (C), by striking 

7 the period at the end of subparagraph (D) and inserting 

8 ‘‘, or’’, and by inserting after subparagraph (D) the fol9 lowing new subparagraph: 

10 ‘‘(E) in the case of an individual, the in11 debtedness discharged is qualified residential in12 debtedness.’’. 

13 (b) QUALIFIED RESIDENTIAL INDEBTEDNESS

14 SHORTFALL.—Section 108 of such Code (relating to dis15 charge of indebtedness) is amended by adding at the end 

16 the following new subsection: 

17 ‘‘(h) QUALIFIED RESIDENTIAL INDEBTEDNESS.—

18 ‘‘(1) LIMITATIONS.—The amount excluded 

19 under subparagraph (E) of subsection (a)(1) with 

20 respect to any qualified residential indebtedness 

21 shall not exceed the excess (if any) of—

22 ‘‘(A) the outstanding principal amount of 

23 such indebtedness (immediately before the dis24 charge), over 

25 ‘‘(B) the sum of—
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1 ‘‘(i) the amount realized from the sale 

2 of the real property securing such indebt3 edness reduced by the cost of such sale, 

4 plus 

5 ‘‘(ii) the outstanding principal amount 

6 of any other indebtedness secured by such 

7 property. 

8 ‘‘(2) QUALIFIED RESIDENTIAL INDEBTED9 NESS.—

10 ‘‘(A) IN GENERAL.—The term ‘qualified 

11 residential indebtedness’ means indebtedness 

12 which—

13 ‘‘(i) was incurred or assumed by the 

14 taxpayer in connection with real property 

15 used as a residence and is secured by such 

16 real property, 

17 ‘‘(ii) is incurred or assumed to ac18 quire, construct, reconstruct, or substan19 tially improve such real property, and 

20 ‘‘(iii) with respect to which such tax21 payer makes an election to have this para22 graph apply. 

23 ‘‘(B) REFINANCED INDEBTEDNESS.—Such 

24 term shall include indebtedness resulting from 

25 the refinancing of indebtedness under subpara-
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1 graph (A)(ii), but only to the extent the refi2 nanced indebtedness does not exceed the 

3 amount of the indebtedness being refinanced. 

4 ‘‘(C) EXCEPTIONS.—Such term shall not 

5 include qualified farm indebtedness or qualified 

6 real property business indebtedness.’’. 

7 (c) CONFORMING AMENDMENTS.—

8 (1) Paragraph (2) of section 108(a) of such 

9 Code is amended—

10 (A) in subparagraph (A) by striking ‘‘and 

11 (D)’’ and inserting ‘‘(D), and (E)’’, and 

12 (B) by amending subparagraph (B) to read 

13 as follows: 

14 ‘‘(B) INSOLVENCY EXCLUSION TAKES

15 PRECEDENCE OVER QUALIFIED FARM EXCLU16 SION; QUALIFIED REAL PROPERTY BUSINESS

17 EXCLUSION; AND QUALIFIED RESIDENTIAL

18 SHORTFALL EXCLUSION.—Subparagraphs (C), 

19 (D), and (E) of paragraph (1) shall not apply 

20 to a discharge to the extent the taxpayer is in21 solvent.’’. 

22 (2) Paragraph (1) of section 108(b) of such 

23 Code is amended by striking ‘‘or (C)’’ and inserting 

24 ‘‘(C), or (E)’’. 
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1 (3) Subsection (d) of section 121 of such Code 

2 is amended by adding at the end the following new 

3 paragraph: 

4 ‘‘(12) SPECIAL RULE RELATING TO DISCHARGE

5 OF INDEBTEDNESS.—The amount of gain which 

6 (but for this paragraph) would be excluded from 

7 gross income under subsection (a) with respect to a 

8 principal residence shall be reduced by the amount 

9 excluded from gross income under section 

10 108(a)(1)(E) with respect to such residence.’’. 

11 (d) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to discharges after the date of the 

13 enactment of this Act.

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