The House of Representatives passed a bill last week that would free homeowners from paying taxes when banks renegotiate the terms of a loan and forgive a portion of outstanding mortgage debt.

The bill passed the House by a wide 386 to 27 margin. A similar bill addressing the needs of homeowners facing foreclosure due to the subprime crisis is pending on the Senate side.

Under existing law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in a tax liability for homeowners.

The tax burden forces many homeowners to opt for foreclosure over restructuring their home loan because forgiven mortgage debt is taxed as ordinary income. The new law would eliminate that tax burden.

"This legislation will play a central role in helping American families avoid foreclosure and stay in their homes," said Brian Catalde, president of the NAHB, which was a strong supporter of the bill along with the National Association of Realtors and Mortgage Bankers Association.

The House bill also includes a provision that extends the deductibility of mortgage insurance. According to the NAHB, mortgage insurance is especially important to low- and moderate-income, first-time home buyers, many of whom may not qualify for a market-rate mortgage.

The existing deduction, which is set to expire on Dec. 31, would be extended through 2014 under the bill passed by the House.