Canceled Mortgage Debt and Taxes

The tax laws specify that canceled debts are included in a person's income and subject to taxes. For reference, the law is Internal Revenue Code Section 61(a)(12).

The tax laws also spell out specific circumstances when a person will not have to pay tax on canceled debts. These are called exclusions, which means the amount will not be included in a person's taxable income.

There are several exclusions available, but only three of them apply to the situation of canceled mortgages. These three exclusions are for:

• Debt canceled in a bankruptcy proceeding,
• Debt canceled when the person is insolvent, and
• Debt that qualifies under the Mortgage Forgiveness Debt Relief Act.

For further reference on canceled debt in gerneral, see the Debt Cancellation section of IRS Publicaiton 908 and the Canceled Debts section of Publication 17.

Index: Canceled Mortgage Debt and Taxes

1. The Basics of Canceled Debt
2. Canceled Debt and Taxable Income
3. Qualifying under the Mortgage Forgiveness Debt Relief Act
4. Separating Acquisition Debt and Home Equity Debt
5. Insolvency Exclusion for Canceled Debts
6. Bankruptcy Exclusion for Canceled Debts
7. Reporting Canceled Debts on the Tax Return
8. More Information About Canceled Debts and Mortgage Forgiveness