Mortgage Forgiveness Debt Relief Act

When you borrow money from a lender and the lender later cancels or forgives the debt, you maybe required to include the cancelled amount as income for tax purposes, depending on the circumstances.

Think of it like this: When you borrow money, you are required to repay it. Because it was a loan, you are not required to include it as “income” because you had an ongoing obligation to repay the money. However, when that obligation is subsequently forgiven/cancelled, your “loan” is now considered “income” because you no longer have that obligation to repay the debt. In the eyes of the IRS, you have now received “income” and you must pay taxes on it.

mortgage forgiveness debt relief act property guidingMortgage Debt Forgiveness Relief Act- (the “Act”)

The Act was designed to protect home owners from having to pay income tax on the forgiven/cancelled debt that resulted from a mortgage restructuring, short sale, or foreclosure.

For example, your loan balance was $450K and the house sold via short sale for $250K. The difference between the balance owed and the price it was sold for is $200K. That amount, if forgiven by the lender, is taxable as “income” by the IRS. Just imagine if your reported income was increased by $200K. The loss of your home aside, the tax implications alone could be devastating.


As I stated in a previous blog, there are several ways to exclude this taxable income, but the primary avenues to do so are through bankruptcy and insolvency. In 2007, the Act added a new exception to the tax code called the Qualified Principal Residence Indebtedness.

How do YOU qualify?

• The house must have been used as a main home, which means it was the principal place of residence for the  debtor.
• The debt must be discharged between 01/01/07 and 12/31/12 (current legislation may be  extending the Act until 12/31/14).
• Amount forgiven must be under $2Million / $1Million if married filing separate.

What LOANS qualify?

• Debt must be secured by the home.
• Debt must have been used to purchase or build the home.
• Debt used to substantially improve the home is permissible.
• Refinanced debt could also qualify but only up to the balance of the original mortgage   prior to the refinancing.

For more information on the Mortgage Forgiveness Debt Relief Act and Cancellation of Debt, take a few minutes to read what the IRS has to say at the link below.,,id=179414,00.html/

This is a generalized discussion on the Mortgage Forgiveness Debt Relief Act and is not intended for any particular set of facts. If you or someone you know is considering a mortgage restructuring, short sale, or foreclosure in Southwest Florida, you should speak to a licensed Florida Attorney as well as your tax advisor.  The author of this blog is a licensed Florida Attorney but is NOT a tax specialist. By no means does this blog create an attorney-client relationship or attorney-client privilege between the Attorney and the readers.

If you would like schedule a free consultation, or have any questions, comments, or suggestions on upcoming topics, please comment below or email

The Guirguis Law Firm, PLLC
1423 S.E. 16th Place, STE 204
Cape Coral, Florida 33990
239.573.9939 Telephone
239.603.9939 Facsimile

Posted on August 8, 2012, in Legal and tagged , , , , , , , , , , , , , , , , , , . Bookmark the permalink. 1 Comment.

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