Cancellation of Debt – Expired

Mortgage debt cancellation can occur when lenders restructure loans, reduce principal balances, or sell properties, either in advance, or as a result, of foreclosure proceedings. Historically, if a lender forgave or canceled such debt, tax law has treated it as cancellation of debt (COD) income subject to tax. Exceptions have been available for taxpayers who are insolvent or in bankruptcy. These taxpayers may exclude canceled mortgage debt income under existing law.

Starting with tax year 2007, legislation was enacted and extended at various times to allow taxpayers to exclude qualified principal residence mortgage COD even if they did not qualify for one of the other provisions for exclusion of this COD income. The most recent extension of this exclusion provision expired at the end of 2016. While some of the prior enactments had retroactive effective dates, there is no current indication this exclusion for qualified COD Income will be resurrected for 2017. So, if you have potential COD income, contact a tax professional to see if you qualify for one of the remaining exclusion provisions.

— Elden Sodowsky