On February 9, 2018, President Trump signed the Bipartisan Budget Act of 2018. One provision of the new law extends the time period of the Mortgage Forgiveness Debt Relief Act of 2007. Under the Mortgage Forgiveness Debt Relief Act, if your mortgage lender forgives or cancels all or part of your mortgage debt—for example, as part of a loan modification or after a foreclosure or short sale—you won’t have to pay income tax on the forgiven amount. (The IRS Code generally treats discharged debt as taxable income to the borrower.)
The Mortgage Forgiveness Debt Relief Act originally applied only to mortgage debt on your principal residence that was forgiven in the years 2007 to 2010. Several extensions expanded that period, and the Bipartisan Budget Act extends the exclusion through 2017. Now, the exclusion applies to qualifying principal residence indebtedness that is discharged before January 1, 2018, and to written discharge agreements executed before January 1, 2018.
You can exclude up to $1 million of forgiven debt from your taxable income—up to $2 million for married couples—and you must meet certain conditions in order to qualify for this tax break. To learn more about the tax break and the conditions to qualify, see Nolo’s article Canceled Mortgage Debt: What Happens at Tax Time? and the IRS article Home Foreclosure and Debt Cancellation.
Effective date: February 9, 2018