Mortgage Foreclosure Tax Relief

Current status and outlook

Updated December 21, 2007

President Bush signed a relief provision into law in December 2007.

Use this page to keep on top of developments concerning legislation designed to protect people from owing income tax when foreclosure on their home results in debt forgiveness.

The issue
Who's affected
Recent events
What's next

The issue

You don't have to report income when you borrow money. You have more cash, of course, but you also have an obligation to repay. What happens if the debt obligation is cancelled without repayment? At that point you're ahead of the game, in theory at least: you received cash and you no longer have to repay, so you have to report cancellation of debt (COD) income.

Rules imposing tax on COD income have been with us a long time, but the current mortgage crisis highlights a problem with those rules. People that go through foreclosure are likely to be financially distressed. They stretched to the limit trying to keep up with payments, then lost the home and likely incurred a lot of other costs for establishing a new place to live and moving their belongings. Then they find out that as part of the process a chunk of the mortgage debt was cancelled and — surprise! — they owe a big tax bill.

There are a number of exceptions to the requirement to report COD income, including debt cancellation that occurs when the debtor is insolvent or in bankruptcy. Many homeowners will find that none of these exceptions apply, however. Legislation has been adopted to create a new exception.

Who's affected

The new exception applies to certain taxpayers that have COD income during the years 2007 through 2009. More details on the provision appear here.

Recent events

Congress passed a final version of this legislation near the end of 2007 and President Bush signed it into law.

What's next

Taxpayers and return preparers will need to be alert to this new law, so they will not needlessly report income when they receive forms indicating COD income.