Occasionally, a lender will forgive a portion of a borrower’s debt or lower the principal amount owed. Any debt forgiveness is subject to the general tax rule that the amount is treated as taxable income to the borrower. There are some exceptions to this rule, but prior to 2007, the borrower was obligated to pay tax on any portion of a mortgage debt for which they were personally responsible. Examples of this would be “short sales,” “workouts,” and foreclosures.
When a portion of a mortgage debt is forgiven and the mortgage covers the borrower’s primary residence, a law passed in 2007 gave troubled borrowers temporary relief. That relief has expired and been extended several times. That relief has expired and been extended several times. The most recent extension, passed in December 2020, offers relief for debt forgiven between January 1 and December 31 of the following year.
The CAA extends the exclusion of cancelled qualified mortgage debt from income for tax years 2021 through 2025. However, the maximum amount of excluded forgiven debt is limited to $750,000.
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Occasionally, a lender will forgive a portion of a borrower’s debt or lower the principal amount owed. Any debt forgiveness is subject to the general tax rule that the amount is treated as taxable income to the borrower. There are some exceptions to this rule, but prior to 2007, the borrower was obligated to pay tax on any portion of a mortgage debt for which they were personally responsible. Examples of this would be “short sales,” “workouts,” and foreclosures.
When a portion of a mortgage debt is forgiven and the mortgage covers the borrower’s primary residence, a law passed in 2007 gave troubled borrowers temporary relief. That relief has expired and been extended several times. The most recent extension, passed in December 2020, offers relief for debt forgiven between January 1 and December 31 of the following year.
I am a real estate professional. What does this mean for my business?
Sale of homes in areas where home prices have dropped or where there have been foreclosures has been made easier by relief from the cancellation of debt rules. Furthermore, granting tax relief rectifies the unfair situation in which the only people who paid tax on the sale of a home were fortunate sellers who had gains of more than $250,000/$500,000 and unfortunate sellers whose property’s value had fallen to a point below what it is worth.
In some parts of the country where home prices have yet to recover, short sale relief is still urgently needed by sellers.
NAR Policy:
NAR is in favor of the phantom income that is created when a primary residence’s mortgage is partially or fully forgiven being excluded from taxation.
When a lender forgives a portion of a debt in a short sale, foreclosure, bank workout, or other situation, there shouldn’t be a taxable event.
A person or family who has lost money on the sale of their primary residence has experienced what is, for the majority of them, the largest financial loss of their lifetime. Given that there will be no cash proceeds from the sale, it is unfair and unreasonable to expect them to pay tax on the phantom income associated with debt cancellation.
Expiring tax provisions have frequently lingered in Congress over the past few years until they have passed away. However, most were reinstated on a retroactive basis.
The group of temporary tax provisions known as the “extenders,” which includes the mortgage debt cancellation relief provision, appeared to be in a state of limbo after the Tax Cuts and Jobs Act of 2017 was passed. It became less likely in 2018 and 2019 that Congress would pass a bill to reinstate the exclusion for those years. But on a larger tax bill that dealt with the expired provisions and retroactively reinstated the exclusion for 2018 through the end of 2020 in December 2019, the two political parties worked together. Then, in December 2020, Congress extended the clause for an additional five years, ending at the end of 2025.
NAR Committee:
None at this time.
Legislative Contact(s):
Evan Liddiard [email protected] 202-383-1083
Regulatory Contact(s):
Evan Liddiard [email protected] 202-383-1083
FAQ
Are mortgages going to be forgiven?
Mortgage lenders are not in the business of forgiving debt. When you execute your mortgage and close on a home, it is anticipated that you will repay it within the specified timeframe. Only after being certain that you won’t be able to pay it back will the lender agree to forgiveness provisions.
How much can you exclude under Mortgage Forgiveness Debt Relief Act?
Forgiven mortgage debt can be excluded from gross income up to $500,000 ($250,000 if married and filing separately by RDP).
When did the Mortgage Forgiveness Debt Relief Act go into effect?
The Mortgage Forgiveness Debt Relief Act of 2007 generally permits taxpayers to exclude income from the discharge of debt on their primary residence (updated September 5, 2019). This relief applies to mortgage debt reduced through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure.
Do mortgage companies forgive debt?
On rare occasions, a lender will forgive a portion of a borrower’s debt or lower the principal amount owed. Any debt forgiveness is subject to the general tax rule that the amount is treated as taxable income to the borrower.