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It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

Will the debt forgiven from my loan modification be treated as income and taxed?

Keith Gumbinger

Q: Will mortgage debt cancelled as a portion of a mortgage modification treated as earned income for tax purposes?

A: The good news is that no, the canceled debt from your loan modification won't be treated as ordinary income.

You can find more information on how this canceled mortgage debt is treated at the IRS newsroom, where it notes: "The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." Although the page notes "This provision applies to debt forgiven in calendar years 2007 through 2017", the Act very much still applies.

The Mortgage Debt Relief Act of 2007 has been re-authorized a number of times over the years, most recently as part of the "Consolidated Appropriations Act of 2021" (P.L. 116-260), signed into law on December 27, 2020. This extended the Act's provisions for forgiven mortgage debt through December 31, 2025. As is often the case, the CAA contained a series of provisions called "extenders" that reauthorized some expired tax breaks, including the provisions of the MDRA, which addressed both mortgage debt cancellation and also allowed for the deduction of Private Mortgage Insurance (PMI) premiums.

Learn how canceled mortgage debt is treated for tax purposes in IRS Topic No. 431 Canceled Debt - Is It Taxable or Not?. In this document, it is noted that the Act applies to "Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2026."

However, the latest extension changed the amount of mortgage debt that is allowed to be excluded from qualifying as income if it has been forgiven by a lender. Previously, up to $2 million in mortgage debt (for married people filing jointly; $1 million filing single) could be excluded; the updated extension limits this to $750,000 ($375K filing single). This aligns the Act with the new mortgage interest deductibility limits that were implemented with 2017's Tax Cuts and Jobs Act.

Should you have any, forgiven mortgage debt will appear on form 1099-C that your lender or servicer will send to you.

When it comes to forgiven debt, there are any number of Exceptions and Exclusions to the Act; these (including examples) are discussed in detail in IRS Publication 4681 under "Qualified Principal Residence Indebtedness" (A summary of these can be seen in the IRS Topic No. 431 referenced above). According to Publication 4861, you'll need to fill out Form 982 and attach it to your tax return, but you should be in the clear if you meet the provisions outlined there.

The extended Act doesn't only apply to mortgage debt forgiven as a portion of a loan modification, either. It also applies to any amounts forgiven in a short sale or deed-in-lieu of foreclosure situation, too.

As is always the case in tax matters, it is always best to check with a tax professional to ensure you both comply with the law -- and receive any benefit the law may provide for your situation.

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Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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