Mortgage Principal Reductions Not Taxable Through 2017 Under New Bill
The Mortgage Forgiveness Debt Relief Act had made these types of mortgage forgiveness non-taxable, but it expired at the end of 2014 and was not renewed. Thus, many homeowners who had portions of their loans written down under loan modification programs like the Home Affordable Modification Program would have been subject to taxation on it had this act not been passed.
Normally, forgiveness of debt — even from a loan modification — is a taxable event and is treated and taxed as if it were income received.
The mortgage tax relief only applies to a homeowner’s principal residence, so it will not apply to investment properties or some rental properties.
The fate of the renewal of this provision was unsure, and despite strong support it had not been able to be passed through the gridlocked Congress during most of 2015.
Homeowners received principal reductions can breathe a sigh of relief that they now won’t be taxed on forgiveness of money that they never had in the first place.