- Learn about cancellation-of-debt (COD) income.
- Discover how the retroactively extended special exclusion for home mortgage debt relief could affect you.
- Learn about the Home Affordable Modification Program (HAMP) and how this extension affects those who took advantage of HAMP.
- Find out if you can file an amended return for 2018 or are eligible for a refund.
On December 20, 2019, President Trump signed into law the Appropriations Act of 2020. This act included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.
Cancellation-of-Debt (COD) Income
Whenever a taxpayer’s debt is forgiven, whether it is credit card debt, home mortgage debt, an auto loan, or other debt, that forgiven debt – referred to as cancellation-of-debt (COD) income – becomes taxable income to the taxpayer unless the debt was discharged in a bankruptcy proceeding or the taxpayer qualifies for one of the tax law exclusions providing relief from taxation of COD income, like home mortgage debt relief.
The decline in the real estate market over a decade ago, combined with the recession, left many homeowners upside down – their mortgages were significantly higher than the value of their home. As a result, many homes went back to the lenders via foreclosure, abandonment, and voluntary reconveyance, leaving taxpayers with taxable COD income.
Home Mortgage Debt Relief
To alleviate this situation and relieve homeowners from COD income, back in 2007, Congress created a special rule that allowed taxpayers to exclude COD income from taxation if the income arose from cancellation of the debt used to acquire the taxpayer’s primary residence. This debt is termed acquisition debt. However, this special provision for home mortgage debt relief expired at the end of 2017. If you faced a similar problem after 2017, you were stuck paying taxes on the COD income.
Thankfully, Congress has retroactively extended home mortgage debt relief back to 2018 and through 2020. By making it retroactive, if you were required to pay tax on forgiven home acquisition debt income in 2018, then your 2018 return can be amended. Fiducial's good tax news: You can recover those tax dollars you paid in 2018!
This exclusion may also apply to home debt discharged as part of the Home Affordable Modification Program (HAMP). Under this program, qualifying individuals could have their mortgage debt reduced so they could afford to remain in their homes. Although this program ended in 2016, the debt was forgiven over three years. So, in some cases, taxpayers may have had debt forgiveness (COD income) in 2018. This COD income will probably qualify for income exclusion that will result in a refund of taxes if the taxpayer amends their 2018 tax return.
Have questions related to home mortgage debt relief? Did you pay taxes on home mortgage debt relief in 2018? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations for answers to your questions. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!