The new Mortgage Forgiveness Debt Relief Act—signed into law on December 20, 2007—provides some tax relief for debtors caught in the subprime mortgage crisis. But the new law also creates other key tax breaks for homeowners. Here is a quick rundown.

Debt forgiveness: This is the provision that has received the most media attention. Under the new law, up to $2 million of mortgage debt forgiveness on a principal residence is tax-free. Normally, this would represent taxable cancellation-of-debt (COD) income. The special tax exclusion is available for a three-year period beginning January 1, 2007, and ending December 31, 2009.

However, this new tax exclusion does not apply if the mortgage discharge is not directly related to a decline in the value of your home or some other financial condition. Furthermore, it does not apply to taxpayers involved in a Title 11 bankruptcy. Finally, you cannot claim the COD exclusion in exchange for rendering services to the lending institution.

Mortgage insurance: Prior to 2007, Congress had authorized a one-year deduction for mortgage insurance premiums as qualified residence interest. A deduction is available on your 2007 return for the full amount of insurance paid (for contracts issued after 2006) if your adjusted gross income (AGI) for the year does not exceed $100,000. But the deduction is gradually phased out and disappears entirely if your AGI exceeds $109,000.

The new law restores the deduction and extends it for three years. Under this provision, you may be able to claim deductions for premiums paid or accrued before 2011 (for contracts issued after 2006).

Home sale exclusion: The home sale exclusion allows you to realize a tax-free gain of up to $250,000 when you sell a home you have owned and used as your principal residence for at least two out of the five years before the sale. The $250,000 exclusion is doubled to $500,000 for married couples. However, prior to the new law, the $500,000 exclusion was available only if a husband and wife filed a joint tax return for the year of the sale.

In other words, if one spouse passed away and the other spouse did not sell the home until the following year or later, the surviving spouse could not claim the $500,000 exclusion. Instead, he or she was limited to the $250,000 exclusion.

The new law eliminates this inequity. For sales after 2007, a surviving spouse may claim a $500,000 exclusion for a sale occurring within two years of death.

Co-op tax breaks: If certain requirements are met, the tenant-stockholders of a co-op are entitled to claim allocable deductions for mortgage interest and property taxes. The new law liberalizes the test used to qualify as a co-op for this purpose. This change applies to tax years ending after December 20, 2007 (the date of enactment).

To offset these tax breaks, the new law includes several revenue-raising provisions. It increases the penalties for partnerships that fail to file returns, institutes a similar penalty for S corporations and adjusts estimated tax payments for certain large corporations in 2012.