Mortgage Forgiveness or Canceled Debt Relief
Important: The Mortgage Debt Relief Act of 2007 allowed you to exclude from income any debt forgiven on your primary home, but the act expired at the end of 2013. Any debt that is forgiven in 2014 or later is taxable income. However, the information below can be used for 2007-2013 Tax Returns.
The mortgage crisis hit many taxpayers hard and mortgage workouts, refinancing, and home foreclosures were the results. The last thing you needed was another tax burden. But there was tax relief available if you had refinanced your mortgage, lost your home through foreclosure, or otherwise had some or all of your mortgage forgiven.
Debt that qualified for exclusion from your taxable income included debt reduced through mortgage refinancing or restructuring as well as mortgage debt forgiven in connection with a foreclosure. You must have used the proceeds from the canceled or refinanced debt to buy, build, or improve your primary home, and the debt must have been secured by your home. Proceeds of forgiven debt used for other purposes, such as to pay off a different debt, did not qualify for exclusion.
Canceled Debt in 2022, 2023
In late August of 2022, the government has signed a massive student loan forgiveness program which has canceled $10,000 - $20,000 in student debt per borrower. As part of the American Rescue Plan, this type of forgiven debt is not taxable income. In most cases, canceled debt is taxable, including student loans. However, a provision in the 2021 American Rescue Plan specifically made this 2022 loan forgiveness nontaxable, so it does not need to be reported on your 2022 Return.
Related: Can my tax refund be taken to pay off debt?
If you had debt that was forgiven or discharged for an amount less than full in any year after 2013, then this is treated as taxable income; on a tax return, specifically, it is reported as other income. This cancellation of debt is typically shown on Form 1099-C and has to be reported on an income tax return for the year in which the debt is forgiven. Different types of forgiveness or cancellation may be exempt and other types of situations may be excluded from gross income.
Exceptions for canceled debt income:
- Amounts canceled as inheritances, gifts, bequests or devises
- Specific student loans that are qualified and canceled under the provision that the loans were to be canceled if you work in a certain profession for a period of time
- Certain other education loan forgiveness or repayment programs which provide health services for certain areas
- Student loan forgiveness or discharge in the case of total and permeant disability or death of the student
- Important: student loans forgiven as part of the recent 2022 act, up to $20,000
- Canceled debt amounts that were paid by you, as a cash basis taxpayer, that would have otherwise been deductible to you
- A qualifying purchase price reduction which is given by the seller to the buyer.
In some few scenarios, a taxpayer may be able to exclude their canceled debt from their taxable income.
Exclusions from Gross Income:
- Canceled debt from a Title 11 bankruptcy case
- Debt that is canceled due to insolvency
- Canceled qualified farm indebtedness
- Certain cancellation for qualified real property business indebtedness or QRPBI
- Cancellation of a qualified principal residence indebtedness or QPRI which is discharged and subject to an arrangement in writing issued before January 1, 2026 - this was originally through 2021, but was extended through 2025 as part of the Consolidated Appropriations Act of 2021.
If you receive a 1099-C, but you fall into one of these exceptions, you may still be eligible to not include the debt forgiveness as income. To do so, report your 1099-C on your return, but include Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness - eFileIT. For more details, see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
The eFile Tax App will help you report your debt forgiveness as Other Income this year - sign up here and file your return now.
Canceled Debt 2007 - 2013
Up to $2 million of forgiven debt is eligible for this exclusion for all filing statuses except for Married Filing Separately (the exclusion limit is $1 million if Married Filing Separately). If you refinance your mortgage, the refinanced debt may be excluded up to the amount of what the mortgage principal was prior to the refinancing.
To claim this special canceled mortgage debt relief, file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, which indicates the type and amount of debt forgiveness to be reduced from your gross income, with your tax return.
Debt forgiven on second homes, rental property, business property, credit cards, car loans, etc. does not qualify for exclusion. In some cases, other kinds of tax relief based on insolvency or inability to finance debt may be available. For example, debt canceled by a bankruptcy is not considered taxable income. Detailed overview of bankruptcy and taxes.
If you had forgiven or canceled debt, you should receive a Form 1099-C from your lender. This form will show the amount of debt forgiven and the fair market value of any property given up through foreclosure. A winning bid at a foreclosure auction is frequently considered to be a property's fair market value or FMV even if the amount may not necessarily reflect the property's true value.
If you receive Form 1099-C, you should check it carefully and notify your lender if any of the information on the form is incorrect. Pay special attention to the amount of debt forgiven (shown in Box 2) and the value listed for your home (Box 7) because you will need to report these figures on your tax return.
Home Foreclosure and Debt Relief Options
You should consider your options carefully before giving up your home through foreclosure. If the debt wiped out through foreclosure exceeds the value of the foreclosed property, the difference is normally taxable income. However, a special rule allows insolvent borrowers to offset that income limited by the amount their liabilities exceed their assets. But be careful; under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was used for business or rented out.
Taxpayers who find they owe additional tax can use a simple form to request an installment payment agreement with the IRS. In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.
For more information about the topics on this page, please see Publication 4681 - Canceled Debts, Foreclosures, Repossessions, and Abandonments.
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