History

• The housing market was volatile in 2007, with interest rates rising, home values decreasing and homeowners on the brink of foreclosure. In December 2007, Congress enacted legislation that provided tax relief for certain forgiven mortgage debts and allowed homeowners to refinance their mortgages without increasing their taxes. The relief was applied retroactively to include debts forgiven during the 2007 calendar year.
  
  

Debt Excluded From Taxable Income

• The tax relief provisions of the Mortgage Forgiveness Debt Relief Act of 2007 only apply to certain mortgage debts. The forgiven debt must be part of a mortgage or home equity line, secured by the home, that's used to build or buy the primary residence or to pay for a significant improvement. The maximum amount of debt that can be excluded is $2 million, or $1 million for married taxpayers filing separately, as of 2010.
  
  

Effective Years

• When it was passed, the 2007 Mortgage Forgiveness Debt Relief Act included debt forgiven in 2007, 2008 and 2009. In October 2008, Congress passed the Emergency Economic Stabilization Act, which extended the provisions of the Debt Relief Act an additional three years so that an exclusion is available for debt forgiven from 2007 through 2012.
  
  

Other Types of Canceled-Debt Tax Relief

• In addition to excludable mortgage debt as provided by the Mortgage Forgiveness Debt Relief Act of 2007, the IRS also allows exclusions for forgiven debt in certain other situations. Debt that's discharged as part of a bankruptcy isn't considered taxable income. Taxpayers who are insolvent at the time of debt forgiveness can exclude the canceled debt from income. In addition, forgiveness of certain farm debts and nonrecourse loans qualifies for exclusion from taxable income.