Will I Owe Taxes on Cancelled Mortgage Debt?

Cancelled debt is sometimes considered as taxable income that needs to be reported to IRS. When a mortgage lender forecloses to recover full or partial payment of the loan, it is considered a “sale” for tax purposes, not a forgiven debt. In that case, your accountant will determine whether you need to report capital gains or losses.

Where the lender accepts a short sale (lower price than balance of loan), you may have a forgiven debt that would normally be reported as taxable income, unless you qualify for an exception or exclusion.  In many cases, lenders will send the borrower a 1099-C form at the end of the year. This form is used to report Cancellation of Debt. Even if you receive a 1099-C, you can still claim an exception or exclusion. Discuss with your accountant to see what you qualify for.


Exceptions include things such as:

  • Debt would have been a deductible item for the borrower if it was actually paid
  • Some payments made under the Home Affordable Modification Program (HAMP). This program was discontinued as of December 2016
  • Cancelled debt obtained through a bankruptcy case
  • Insolvency¬†immediately before the cancellation of the debt (amount by which total debts exceeded total assets)


Exclusions include things such as:

  • Debt cancelled in a Chapter 11 bankruptcy or during insolvency
  • Cancelled qualified real estate business debt
  • Principal residence debt under terms of the Mortgage Debt Relief Act. Discontinued in 2017 but can still apply to debt that is discharged in 2018 as long as the agreement was entered into by 2017.

NOTE: This post is for educational purposes only. Be sure to consult a tax attorney or qualified accountant for advice regarding your specific situation.

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