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.
Be it enacted by the Senate and House of Representa-
tives 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 2005’’.
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 exclu-
sion 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 fol-
lowing new subparagraph: 
‘‘(E) in the case of an individual, the in-
debtedness discharged is qualified residential in-
debtedness.’’. 
(b) 
QUALIFIED
RESIDENTIAL
INDEBTEDNESS 
SHORTFALL.—Section 108 of such Code (relating to dis-
charge 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 dis-
charge), over 
‘‘(B) the sum of—
‘‘(i) the amount realized from the sale 
of the real property securing such indebt-
edness reduced by the cost of such sale, 
plus 
‘‘(ii) the outstanding principal amount 
of any other indebtedness secured by such 
property. 
‘‘(2) 
QUALIFIED
RESIDENTIAL
INDEBTED-
NESS.—
‘‘(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 a residence and is secured by such 
real property, 
‘‘(ii) is incurred or assumed to ac-
quire, construct, reconstruct, or substan-
tially improve such real property, and 
‘‘(iii) with respect to which such tax-
payer makes an election to have this para-
graph apply. 
‘‘(B) REFINANCED INDEBTEDNESS.—Such 
term shall include indebtedness resulting from 
the refinancing of indebtedness under subpara-
graph (A)(ii), but only to the extent the refi-
nanced 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 such 
Code 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 EXCLU-
SION; 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 in-
solvent.’’. 
(2) Paragraph (1) of section 108(b) of such 
Code is amended by striking ‘‘or (C)’’ and inserting 
‘‘(C), or (E)’’.
(3) Subsection (d) of section 121 of such Code 
is amended by adding at the end the following new 
paragraph: 
‘‘(12) 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.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to discharges after the date of the 
enactment of this Act.
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