Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners who have had mortgage debt forgiven or canceled (perhaps through a mortgage modification or restructure) or who have suffered through a foreclosure may not owe income tax on that forgiven debt come tax time. To learn about the tax implications of forgiven debt and whether you can exclude forgiven mortgage debt from your taxable income on your tax return, read on. (If you're interested in reading about foreclosure and mortgage modification, visit Nolo's Foreclosure section. And, for more information on dealing with debt, check out Nolo's Debt & Collection Agencies topic .)
Ordinarily, when debt is forgiven or canceled by a lender, the amount that has been forgiven is considered income for tax purposes, whether the debt is a mortgage or another kind of credit. That means you must report the amount of the canceled (or forgiven) loan on your tax return and pay taxes on it, just like any other kind of income. The amount of the loan is considered income only once it's forgiven -- and not when you first borrowed the money. (When it's clear you won't be repaying the money you received, tax law recognizes the money as income.)
To keep financially strapped homeowners from taking a second hit at tax time, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. What this means for taxpayers is that, if part or all of your mortgage debt on your principal residence is forgiven in any tax year from 2007 to 2016, you might be able to exclude as much as $2 million of that forgiven debt from your taxable income.
The Act was originally scheduled to sunset in 2010, but was extended through 2012 by the Emergency Economic Stabilization Act of 2008. It was extended again (through 2013) by the fiscal cliff legislation in early 2013. And then extended again on December 19, 2014 in the Tax Increase Prevention Act to include debt forgiven through 2014. It was later extended for a fourth time and now applies to debt forgiven in calendar years through 2016, as well as debt discharged in 2017 if there was a written agreement entered into in 2016.
If some or all of your mortgage debt has been forgiven or canceled by your lender, will you be able to get out of paying income tax on that forgiven debt under the Mortgage Forgiveness Debt Relief Act of 2007? Here are some key factors to consider.
The IRS has more information about the Mortgage Forgiveness Debt Relief Act of 2007 and instructions for taxpayers at www.irs.gov. And, for more tips on getting your tax return together this year, visit Nolo's Personal Income Taxes section.