Congress has passed legislation that would open up a three-year window during which homeowners who end up in foreclosure — or negotiate workouts or short sales with lenders — won’t have to pay taxes on up to $2 million of forgiven debt.

The House has approved the Senate’s amendments to HR 3648, the Mortgage Forgiveness Debt Relief Act, which eliminate provisions of the bill opposed by the Bush administration.

As originally passed by the House on Oct. 4, the bill would have permanently changed the tax code to exempt forgiven debt on a primary residence from being taxed as income.

But the exemption — along with an extension of an existing tax deduction for private mortgage insurance — would have reduced tax revenues by about $2 billion over a 10-year period. So the House bill had envisioned tightening the rules for claiming deductions on the sale of a second home, vacation or rental property converted to a primary residence.

In approving its own bill Friday, SB 1394, the Senate amended HR 3648 to make both changes effective for three years, while leaving unchanged the rules for claiming deductions on gains from the sale of a second home.

Housing and real estate industry groups welcomed passage of the bill, which is expected to be signed into law by the president.

The National Association of Home Builders said in a statement that the legislation — along with pending bills that would expand FHA loan guarantee programs and overhaul oversight of Fannie Mae and Freddie Mac — “are critical to help the housing and credit markets to stabilize and recover and to keep the economy moving forward.”

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