Client Bulletin 11-15-09:Home mortgage debt forgiveness relief
Home mortgage debt forgiveness relief
November 15, 2009
For indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2013, taxpayers generally may exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, under Code Sec 108(a)(1)(E), gross income doesn’t include any discharge of qualified principal residence indebtedness. Qualified principal residence indebtedness is acquisition indebtedness with respect to the taxpayers ‘s principal residence, but with a $2 million limit ($1 million for married individuals filing separately). Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual’s principal residence that is secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing doesn’t exceed the amount of the refinanced indebtedness.
The basis of the taxpayer’s principal residence is reduced by the excluded amount, but not below zero. If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness.
The exclusion doesn’t apply to a loan discharged on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer’s financial condition. The exclusion also doesn’t apply to a taxpayer in a Title 11 bankruptcy. An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the exclusion for insolvent taxpayers., which allows insolvent taxpayers to exclude cancellation of indebtedness income to the extent of the insolvency.
