Understanding Mortgage Debt Cancellation

Mature Man Signing Papers

(From realtor.org) A lender will, on occasion, forgive some portion of a borrower’s debt. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available, but, until recently, when a lender forgave some portion of a mortgage debt (such as in so-called “short sales,” foreclosures and “workouts”), the borrower was required to pay tax on the debt forgiven.

A law enacted in December 2007 provides relief to troubled borrowers when some portion of mortgage debt is forgiven. That relief expires on Dec. 31, 2012. Use this information to better understand mortgage debt cancellation:

General Rule for Debt Forgiveness:

If a lender forgives some or all of an individual’s debts, the general rule is that the forgiven amount is treated as ordinary income and the borrower must pay tax on the forgiven amount. Exceptions apply for bankruptcy, insolvency and certain other situations, including mortgage debt. Read more.

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