Home Mortgage Debt Forgiveness May Be Expiring Soon

Since 2007, homeowners have been allowed to exclude from their taxable income up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion had been available only for debts forgiven through 2012, but Congress extended it. Now that expiration date — Dec. 31, 2013 — is rapidly approaching.

You can have COD income if a creditor forgives a debt, reduces the interest rate or gives you more time to pay or in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement.

If you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion in case it’s not extended again.