Mortgage Debt Tax Relief and the Consolidated Appropriations Act of 2021

If you have had mortgage debt forgiven after a foreclosure, or through a short sale or deed in lieu of foreclosure, you could owe a significant amount of taxes on that forgiven debt. However, you should know that the Consolidated Appropriations Act of 2021 has extended the Qualified Principal Residence Indebtedness (QPRI) through 2025. What does this mean for taxpayers who have had mortgage debt forgiven? In short, for some of those taxpayers, it may be possible to exclude the forgiven mortgage debt from income for purposes of paying federal income taxes.

Any taxpayers who received a 1099-C, which is a Cancellation of Debt form, from a mortgage lender, it will be important to determine whether or not the QPRI exclusion is applicable to your situation. If the QPRI exclusion does apply, you will not need to pay federal income taxes on the forgiven debt. In addition, homeowners who are anticipating that they will go through a short sale or a deed in lieu of foreclosure anytime through 2025 should learn more about whether they may be eligible for the QPRI exclusion as a result of the extension.

Understanding the Qualified Principal Residence Indebtedness Exclusion

What is the QPRI exclusion, and how does it work? If your home goes into foreclosure and the house is sold through a foreclosure auction, or if you do a short sale or a deed in lieu of foreclosure, there will be an amount of remaining mortgage debt that the bank will typically forgive. For example, if you owe $300,000 on your mortgage and a foreclosure auction or short sale only results in the bank making $100,000 on the property, the remaining amount—or $200,000 in this example—would be forgiven by the bank. But that forgiven debt can lead to tax liability.

The federal government generally includes any debt that is forgiven as part of your gross income. Accordingly, in the example above, that $200,000 in forgiven debt would be added onto your gross income and would be taxable as income. On a high amount of mortgage debt, a person’s tax liability can be considerable. However, the QPRI exclusion allows certain borrowers who have had mortgage debt forgiven to exclude the amount of forgiven debt from their income so that it is not taxed and does not result in tax liability.

Who is Eligible for the QPRI Exclusion?

In order to be eligible for the QPRI exclusion, you must meet the following requirements:
  • Mortgage debt must have been forgiven between the calendar years 2007 and 2025; and
  • Mortgage debt that has been forgiven must have been taken on by the borrower to buy, build, or make renovations to their principal residence.
Refinancing debt may be eligible if the proceeds from the refinancing were used to make major renovations or improvements to the principal residence. The Mortgage Forgiveness Debt Relief Act of 2007 initially introduced the QPRI exclusion, and it was added later to U.S. tax law. The exclusion would have expired on January 1, 2021, but the new law has extended the exclusion to January 1, 2026 (and may even apply to mortgage debt forgiven after that date if the debtor and lender enter into a written agreement about the debt forgiveness prior to January 1, 2026).

Contact a Short Sale Lawyer in Oak Park

If you have questions about debt forgiveness following a short sale, deed in lieu, or foreclosure sale, one of our Oak Park short sale lawyers can assist you. Contact the Emerson Law Firm to learn more.



See Related Blog Posts:

Is a Mortgage Modification My Only Option to Avoid Foreclosure?

How Long Can Foreclosure Suspensions Last?

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