A: The good news is that no, the canceled debt from your loan modification won't be treated as ordinary income. On February 9, Congress passed, and President Trump signed into law, H.R. 1892, the “Bipartisan Budget Act of 2018” (the Budget Act, P.L. 115-123). This contained a series of provisions called "extenders" that included some expired tax breaks, including the provisions of the Debt Relief Act of 2007, which addressed both mortgage debt cancellation and allowed for the deduction of Private Mortgage Insurance (PMI) premiums.
You can find more information on how this debt is treated at: https://www.irs.gov/newsroom/home-foreclosure-and-debt-cancellation
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."
These exceptions are discussed in detail in Publication 4681. According to the above document, you'll need to fill out Form 982 and attach it to your tax return, but you should be in the clear. Although the page notes that "This provision applies to debt forgiven in calendar years 2007 through 2017", the "extenders" in the "Further Consolidated Appropriations Act, 2020" reauthorized the provisions of the Mortgage Debt Relief Act for the 2019 and 2020 tax years.
Importantly, it also retroactively covers deductibility of forgiven mortgage debt for tax year 2018, so if you had mortgage debt forgiven in 2018 and filed a return 2018 with itemized deductions on Schedule A, you might consider filing an amended tax return, to capture the now-allowed deductibility of forgiven debt for 2018, if it is worth it in your situation.
