The forgiven amount is the difference between the amount owed on the mortgage and the value of the home. Prior to 2007, consumers had to pay federal taxes on the forgiven amount.
Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, mortgage debt can be forgiven if the following requirements are met:
- The debt forgiveness took place between Jan. 1, 2007 and Dec. 31, 2012
- The debt must be on your primary residence, not a vacation home or rental property.
- The debt forgiven can be up to $2 million ($1 million for married filing separate returns).
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- Not all canceled mortgage debt qualifies. The mortgage must have been used to acquire or construct your home, or to improve it. It can also be a mortgage that was refinanced, but only up to the amount of the old mortgage principal, just before the refinancing. If you used your home equity for other purposes, that portion of your forgiven debt is taxable.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision.
For more information, please refer to IRS.gov, Publication 4681 and the video.