What is the Mortgage Debt Relief Act?

The Mortgage Debt Relief Act offers tax relief for borrowers who have had debt forgiven. It is possible your lender cancels or forgives your debt due to market or personal factors. In this case, you may be responsible to report the debt as income and pay taxes on the forgiven debt. The Mortgage Debt Relief Act eliminates this tax for some borrowers. Here is a basic description of the Act:

  • You received income in the form of debt when you took the loan, but you did not pay taxes on this income because you would be paying it back later.
  • When the debt was forgiven, you did not repay the income. Therefore, the income could be taxed.
  • In 2007, the Mortgage Debt Relief Act was put in place to help borrowers during the housing crisis and recession that swept the country.
  • Debt forgiven or cancelled between 2007 and 2012 may be eligible. 
  • The Act only applies to debt that was used to buy, build or improve your principal residence. This typically means a primary mortgage or home equity loan.
  • If your debt was cancelled for the following reasons, it is not taxable under any circumstances: bankruptcy, insolvency, some farm debs, non-recourse loans and qualified principal residence loans.