text: SECTION 1. SHORT TITLE.
  
      This Act may be cited as the ``Mortgage Cancellation Relief Act of 
  2004''.
  
  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 exclusion from gross income) is 
  amended by striking ``or'' at the end of subparagraph (C), by striking 
  the period at the end of subparagraph (D) and inserting ``, or'', and 
  by inserting after subparagraph (D) the following new subparagraph:
                      ``(E) in the case of an individual, the 
                  indebtedness discharged is qualified residential 
                  indebtedness.''.
      (b) Qualified Residential Indebtedness Shortfall.--Section 108 of 
  such Code (relating to discharge of indebtedness) is amended by adding 
  at the end the following new subsection:
      ``(h) Special Rules for Qualified Residential Indebtedness.--
              ``(1) Limitations.--
                      ``(A) In general.--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--
                              ``(i) the outstanding principal amount of 
                          such indebtedness (immediately before the 
                          discharge), over
                              ``(ii) the sum of--
                                      ``(I) the amount realized from the 
                                  sale of the real property securing such 
                                  indebtedness reduced by the cost of 
                                  such sale, and
                                      ``(II) the outstanding principal 
                                  amount of any other indebtedness 
                                  secured by such property.
                      ``(B) Overall limitation.--The amount excluded 
                  under subparagraph (E) of subsection (a)(1) with 
                  respect to any qualified residential indebtedness shall 
                  not exceed $50,000.
              ``(2) Qualified residential indebtedness.--
                      ``(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 
                          by the taxpayer as a principal residence 
                          (within the meaning of section 121) and is 
                          secured by such real property,
                              ``(ii) is incurred or assumed to acquire, 
                          construct, reconstruct, or substantially 
                          improve such real property, and
                              ``(iii) with respect to which such taxpayer 
                          makes an election to have this paragraph apply.
                      ``(B) Refinanced indebtedness.--Such term shall 
                  include indebtedness resulting from the refinancing of 
                  indebtedness under subparagraph (A)(ii), but only to 
                  the extent the refinanced 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.
              ``(3) Regulations.--The Secretary may by regulation provide 
          for the disallowance of an exclusion under this section by 
          reason of subparagraph (E) of subsection (a)(1) in cases where 
          the failure to repay the indebtedness is due to the bad faith 
          of the taxpayer.''.
      (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 exclusion, 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 insolvent.''.
              (2) Paragraph (1) of section 108(b) of such Code is amended 
          by striking ``or (C)'' and inserting ``(C), or (E)''.
              (3) Subsection (b) of section 121 of such Code is amended 
          by adding at the end the following new paragraph:
              ``(4) 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 any amount excluded 
          from the gross income of the taxpayer 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.
target: Mortgage Cancellation Relief Act of 2004 - Amends the Internal Revenue Code to exclude from gross income amounts up to $50,000 attributable to the discharge of certain residential mortgage obligations.
feat_title: 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.