The Bush administration is seeking to narrow the scope of a bill that would give homeowners facing foreclosure a tax break when lenders forgive part of their debt.

The administration supports a provision of the bill that would amend a section of the tax code that allows the IRS to tax as income any debt that’s forgiven in a foreclosure sale, or when mortgage lenders agree to modify loan terms or allow short sales.

But the change to the tax code should only be temporary, the administration said Tuesday, “to avoid distorting consumer and lender decisions on new mortgage loans” after mortgage markets emerge from the current “transition period.”

“The tax code already protects people who are insolvent or whose debt has been discharged in bankruptcy from having to pay tax when debt is cancelled; therefore, the most financially stressed mortgage borrowers are already protected under current law,” the administration said in a policy statement. The White House said it “looks forward to working with Congress to narrow the scope of the bill and ensure that it addresses current difficulties without the potential for influencing future behavior.”

The bill — HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007 — received unanimous approval Sept. 26 from the House Committee on Ways and Means, and is scheduled for a House vote Thursday.

The administration said it also objects to a provision of the bill that would make up for the expected lost tax revenue by tightening the rules for counting a second home, vacation or rental property as a primary residence for tax purposes.

Under current law, married couples can claim a deduction of up to $500,000 on gains from the sale of a primary residence, and can count a second home as a primary residence if they lived there two of the five years before the sale.

By tying the size of the exemption to the actual number of years a second home is used as a principal residence, the bill would raise an estimated $2 billion in additional taxes during the next 10 years.

The tighter restrictions on claiming a second home as a primary residence are intended to offset the estimated $1.38 billion reduction in tax revenue over the next 10 years if forgiven debt is no longer counted as income. HR 3648 would also extend the new deduction for private mortgage insurance to 2014 at a cost of $570 million over 10 years.

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