President Bush has signed a bill into law that gives a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income. While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes. Steep prepayment penalties on adjustable rate mortgages have made it difficult for some to get out of their mortgages, and some overstretched homeowners can’t afford to refinance or sell their homes.

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