Big Change for Primary Residence Debt in 2017


This post is in: Blog, Real Estate
4 Comments

Prior to January 1, 2017, if you had lost your home due to foreclosure or did a short sale, the debt that was forgiven was exempted from tax. Normally, debt that is forgiven is called Cancellation of Debt Income (COD Income) and is subject to regular income tax. There are a few exceptions and it used to be that the debt on your home was one of those.

This tax provision expired at the end of 2016 and so some people with upside down primary residences are wondering what to do now. If they walk away from their homes, they don’t get a write-off from the loss. Instead they get taxes. That really doesn’t seem fair. Talk about getting hit with another punch when you’re already down.

We had hoped that a bill introduced January 2017 would extend the exclusion from home mortgage income debt forgiveness. Or, even better, make the exclusion permanent. Unlike a real estate investment, if you lose money on your primary residence, you don’t get a write-off. And if there is debt forgiveness you have taxable gain.

Right now, there are still a few ways that you may be able to get an exclusion. If the bill passes in the next few months, it will hopefully be dated back to January 1, 2017. But if it doesn’t, one of these options may help you. Exclusions include:

  • Debt cancelled in a Title 11 bankruptcy,
  • Debt cancelled when you are insolvent,
  • Qualified farm debt canceled,
  • Qualified real property business debt canceled, or
  • Primary residence debt discharged in 2017 that was part of a written agreement in 2016 or prior.

Talk to your CPA before year-end to see if you can qualify for one of these exclusions.



4 Comments

  1. Diane Kennedy says:

    In order to claim the exemption, you need to file Form 982. So if you received a Form 1099-COD, you need to file the form.

  2. Kevin says:

    Hello Diane

    Are you saying that any primary mortgage debt cancellation in 2017 (3/27/2017 to be exact) is exempt from having to pay taxes? mine was a second mortgage. I received a 1099C.. i was going to file a Form 982 claiming insolvency. But being that my debt was a 2nd mortgage of my primary home am i automatically excluded?

  3. Diane Kennedy says:

    This is a 11/14/2017 article.

    Prior to about 2 weeks ago, the provision you discussed expired as of 12/31/2016. In a last minute change, Congress extended the primary mortgage debt cancellation forgiveness and it will be still be valid for 2017. As of Nov 2017, it was not.

  4. James says:

    This is something I don’t understand. On non-recourse debts, the IRS publications say that if you forfeit the property, and the fmv of the property is less than the debt owed, and the creditor cancels your debt, you don’t have to include the cancelled debt as income. As I understand it, most mortgages are non-recourse. So, there shouldn’t be any income to exclude anyway.

Leave a Comment