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What qualifies for mortgage forgiveness debt relief?

SOLVEDby TurboTax200Updated December 29, 2021

The Mortgage Forgiveness Debt Relief Act of 2007 provided special relief to homeowners whose qualified mortgage debt was forgiven by lenders. Under the Act, the forgiven debt could be excluded from taxable federal income if it was granted between January 1, 2007 and December 31, 2020, both dates inclusive.

The Further Consolidated Appropriations Act of 2021 extended the qualified principal residence indebtedness exclusion to discharges made through December 31, 2025.

To qualify, the forgiven debt must have been on your primary residence (not a second home, investment, or rental property), and must be secured by this primary residence. In addition, the mortgage must have been used to buy, build, or substantially improve your main home.

Refinanced mortgages qualify, as long as the debt is secured by your primary residence and was used to buy, build, or substantially improve your main home. Refinanced mortgages only qualify up to the amount of the old qualified mortgage principal before the refinance. Refinance proceeds that were used to buy a car, pay off credit cards, or for other purposes don't qualify for relief (that is, they're counted as taxable income).

If forgiveness for your mortgage debt was granted after December 31, 2020, you can exclude up to $750,000 ($375,000 if married and filing separately).

If forgiveness was granted between January 1, 2007 and December 31, 2020, you can exclude up to $2 million ($1 million if you’re married and filing separately). This situation only applies if you’re filing or amending a prior-year tax return.

Not all states follow this law, which means that some taxpayers will still have to pay state tax on forgiven mortgage debt.

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