On December 19, 2014 President Obama signed H.R. 5771, the Tax Increase Prevention Act. One of the provisions of that Act extends the tax break for homeowners who have had mortgage debt canceled or forgiven in 2014.
When Is Mortgage Debt Forgiven?
Thousands of financially struggling homeowners had mortgage debt forgiven by their lenders in the past year. Mortgage debt forgiveness might happen as part of a mortgage modification – lenders often forgive part of the principle in order to make a loan more affordable. It also sometimes happens after foreclosure. If you go through a foreclosure and still owe money to your lender (because your mortgage was higher than the value of your home), the lender might forgive that debt (in some states and under some circumstances the lender must forgive the debt). Your mortgage lender might also agree to forgive any remaining mortgage debt after a short sale. (Learn more about tax consequences after foreclosure or short sale.)
Forgiven Mortgage Debt as Income for Tax Purposes
Prior to 2007, if your lender forgave or canceled mortgage debt, the IRS would treat that canceled debt as income. That means you’d have to pay taxes on it. Ouch.
The Mortgage Forgiveness Debt Relief Act of 2007
Congress changed that when it passed the Mortgage Forgiveness Debt Relief Act of 2007. The Act allows homeowners to exclude up to $2 million of forgiven mortgage debt on their principal residence from their taxable income. Congress initially limited this tax break to debt forgiven between 2007 and 2010. It later extended the time period through 2012, and then again through 2013. (There are other important conditions that you must meet in order to qualify for this exclusion. To learn more, see Canceled Mortgage Debt: What Happens at Tax Time?)
HR 5771 Extends the Tax Break Through 2014
Congress’ latest extension (in H.R. 5771) extends the tax break to debt forgiven in 2014.
Permanent Relief on the Horizon?
So what happens if some or all of your mortgage debt is forgiven in 2015? As it stands now, you’ll be out of luck. However, relief may be on the way. Representative Alan Grayson introduced H.R. 5785 into Congress on December 3, 2014. It is now in the House Ways and Means Committee. If enacted, H.R. 5785 would make permanent the tax break for forgiven mortgage debt. Stay tuned.