Fiscal Tax Blog

Mortgage Debt Forgiveness Relief Act is a new tax law passed in 2008 that extends a temporary rule for cancellation of indebtedness income.  When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt, the tax code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act excludes from federal tax those discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

Tax Tip: The Mortgage Forgiveness Debt Relief Act also helps homeowners whose mortgage debt may have been reduced through a restructuring (also known as a mortgage workout). Short sales and deed-in-lieu-of foreclosure are also covered by the extension.

Tax Tip: If part of the forgiveness is due to personal debt, then that portion may have to be included in income by the taxpayer unless the taxpayer is insolvent.  See additional instructions for Form 982.  There are additional debts that might be excludable on Form 982.

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