Rep. Charles "Charlie" Rangel , Democrat from New York and Chairman of the House Ways and Means Committee, today introduced  H.R. 3648 to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.

Currently the tax code requires lenders to 1099 a borrower for any debt relief. The IRS then treats this as reported income subject to income tax. This is common with short sales where the lender agrees to take less than what is owed on the property because the sales price doesn't cover what is owed in addition to associated selling costs and any other liens, such as unpaid real estate property tax. The seller avoids foreclosure and an even worse hit to their credit, but now faces a tax bill.

Rep. Rangel refers to this as a "double whammy". His bill would eliminate this double whammy in certain circumstances.

The bill was referred to the House Ways and Means Committee for review.

UPDATE: House Passes Short Sale Related Mortgage Forgiveness Debt Relief

UPDATE: Senate Passes Mortgage Forgiveness Debt Relief Act of 2007

UPDATE: President Bush signs HR 3648, The Mortgage Forgiveness Debt Relief Act of 2007.

*Short Sale and Phantom Tax Debt Relief Overview - an overview of the debt forgiveness portion of the bill.