One of the key provisions of the “Fiscal Cliff” compromise recently signed into law was the one year extension of the Mortgage Forgiveness Debt Relief Act. Congress originally passed this legislation in 2007 which generally allows taxpayers to exclude the forgiveness of mortgage debt from being counted as taxable income by the Internal Revenue Service. Debt on a homeowner’s primary residence that is reduced through a short-sale, foreclosure, or other forms of mortgage restructuring now continue to qualify for this type of relief, at least for another year.
Normally when you borrow money from a commercial lender and the debt is cancelled or forgiven, absent certain exceptions, you may have to include the cancelled amount as income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. The Mortgage Forgiveness Debt Relief Act, scheduled to expire at the end of last year, exempts the forgiveness of mortgage debt from being counted as taxable income by the IRS.