Home Mortgage Debt Forgiveness Relief  
By Mariann Krieger
Community Bank Advisor, 2008 Winter

For indebtedness discharged on or after January 1, 2007 and before January 1, 2010, the Mortgage Forgiveness Debt Relief Act of 2007 (MRA) generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, the MRA provides that gross income does not include any discharge of qualified principal residence indebtedness. The basis of the taxpayer’s principal residence is reduced by the excluded amount, but not below zero.

Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer’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 does not exceed the amount of the refinanced indebtedness.

This exclusion does not apply to the discharge of a loan if the discharge is due to 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. This exclusion also does not 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 Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers.

As mentioned above, this exclusion applies only to a taxpayer’s principal residence. Therefore, while interest for a taxpayer’s vacation home may be deductible, debt forgiven with respect to such vacation home is not excludible from the taxpayer’s gross income.