President Bush on December 20 signed a bill (H.R. 3648) to exclude from gross income up to $2 million in "acquisition" debt forgiven on a mortgage directly related to a decline in the value of the the residence or to the financial condition of the taxpayer. Therefore, it appears that additional amounts borrowed based on the residence equity would not qualify.
Under H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, the tax exemption for mortgages is limited to a taxpayer's primary residence and to debt forgiven during tax years 2007, 2008, and 2009.
The measure also extends for three years, through 2010, the treatment of private mortgage insurance as deductible qualified residence interest for some taxpayers, and it treats as nontaxable income 50 percent of state and local tax rebates or reductions given to volunteer emergency responders.
Additionally, the Bill adds, effective January 1, 2008, in the case of a sale of his/her primary residence by an unmarried individual whose spouse is deceased on the date of such sale, the surviving spouse gets to exclude $500,000 in capital gain if such sale occurs not later than 2 years after the date of death of such spouse.
Click here for a copy of the bill.