The federal Further Consolidated Appropriations Act, 2020, signed by the president on December 20, 2019, extends the Qualified Principal Residence Indebtedness (QPRI) exclusion through the year 2020. This exclusion allows some taxpayers who've had mortgage debt forgiven—like after a foreclosure, loan modification, short sale, or deed in lieu of foreclosure—to exclude the canceled amount from their income for federal tax purposes.
If you receive a 1099-C (Cancellation of Debt) form from your mortgage lender for the 2019 tax year, or if you filed a tax return for the 2018 tax year that included income from mortgage loan forgiveness, you need to pay close attention to this extension. If the QPRI exclusion applies, you don't have to report the forgiven principal as income on your tax return, which is good news.
This extension is also good news for homeowners thinking about completing a loan modification, short sale, or deed in lieu of foreclosure in 2020 because any of the debt that's forgiven as part of the transaction might not be subject to taxation.
If a mortgage lender forgives all or part of a borrower's debt as part of a loan modification or after a foreclosure, short sale, or deed in lieu of foreclosure, the forgiven amount is generally included in the borrower's gross income and could result in tax liability. That's because the IRS Code generally treats discharged debt as taxable income.
But the QPRI exclusion allows some borrowers to exclude up to $1 million (up to $2 million for married couples) of forgiven debt from their taxable income. If you meet the conditions to qualify for this tax break—like the the forgiven debt was used to buy, build, or substantially improve your principal residence—you won't have to pay income tax on the forgiven amount.
The QPRI exclusion was first introduced in the Mortgage Forgiveness Debt Relief Act of 2007, and I.R.C. § 108(a)(1)(E) was added to the Internal Revenue Code. The exclusion originally applied to mortgage debt on a principal residence that was forgiven only in the years 2007 to 2010. Several extensions expanded that period, and the Bipartisan Budget Act extended the exclusion through 2017. It also applied to debt discharged in 2018 if the borrower entered into a written agreement in 2017.
Now, thanks to the new law, the QPRI exclusion applies to debt discharged before January 1, 2021, and it applies retroactively to debts that were forgiven in 2018 and 2019. The exclusion also applies to debts forgiven as the result of a written agreement entered into before January 1, 2021, even if the actual discharge happens later. (I.R.C. § 108(a)(1)(E)).
To learn more about this tax break and the conditions to qualify, read Canceled Mortgage Debt: What Happens at Tax Time? Also, review IRS Publication 4681 on Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Tax laws are complicated, and even if you don't qualify for the QPRI exclusion, another exception or exclusion could save you from having to pay taxes on canceled debt. If you received a 1099-C form indicating your lender forgave all or part of your mortgage debt, or if you're considering completing a loan modification, short sale, or deed in lieu of foreclosure that has tax implications, talk to a tax attorney or tax accountant to get advice specific to your circumstances.
Effective date: December 20, 2019