The Mortgage Forgiveness Debt Relief Act became law in 2007 during the housing crisis. The goal was to help borrowers with underwater mortgages. It helped people not get further into financial trouble after they settled with their lenders. Some things to consider about the law are: 

  • You need tax relief because the Internal Revenue Service (IRS) considers loan forgiveness income. 
  • The government extended the benefits through the end of 2020. 
  • You may be able to avoid this tax, but the exclusions are complicated. So, you probably need professional help using them. 

The law contains the Qualified Principal Residence Indebtedness (QPRI) exclusion. This allows some borrowers who had mortgage balances forgiven to exclude the canceled amount from federal income taxes. This includes people who will receive a 1099-C in 2020. It also includes those who received this form in 2018 and 2019 as well. 

Why do You Need the Mortgage Forgiveness Debt Relief Act? 

If you are in financial distress your lender may forgive your mortgage balance. Some reasons they will do this include: 

  • Loan modification 
  • Foreclosure 
  • Short sale 
  • Deed in lieu of foreclosure 

The IRS considers your forgiven liabilities income. Banks must report the amount to the government and issue you a 1099-C. Without tax relief, you must pay as if it is income.1  

QPRI Exclusion 

The QPRI extension lets some borrowers exclude up to $1 million for individuals and $2 million for married couples of forgiven liabilities. If your lender forgives all or part of your mortgage loan before January 1, 2021, then you may qualify if: 

  • Your lender forgave the balance on your primary residence. 
  • You used the mortgage as an acquisition loan – You used it to buy, build, or improve your home (not an equity or consolidation loan). 
  • It is acquisition debt from a refinanced loan. You may only include the amount of your original mortgage – Anything over is equity and the government won’t exclude it from taxes. 
  • A court discharged your balances after a bankruptcy. 

You still may be able to exclude your home equity balances under the insolvency exclusion. Insolvency happens when your liabilities are more than your asset’s value. You can use it for your equity mortgage, but you can also use it for other types of debt. Speak with a tax lawyer or accountant about this option.2  

Federal Further Consolidated Appropriations Act, 2020 

The Mortgage Forgiveness Debt Relief Act dates back to December 2007. It enabled people to deduct acquisition mortgage balances from their federal income taxes. At the time falling housing prices left many underwater, and they couldn’t sell their homes for as much as they owed on their loans. Banks forgave many loans and wrote off the losses, but that left borrowers with another problem. 

The IRS considers the amount of forgiven liabilities as taxable income. Banks must report the amount to the IRS and issue a 1099-C to the borrower. The person who just lost their house must now pay taxes with money they don’t have.  

This law enabled people to exclude this from their federal income taxes. Originally, it ran from 2007 until 2010. The Federal Further Consolidated Appropriations Act, 2020 extends its benefits until the end of 2020. 

How Can You Avoid Tax on Debt Forgiveness? 

You can avoid tax two ways depending on the type of obligation it was. The first way is you exclude the discharged liabilities from your taxable income. This includes: 

  • Gifts, inheritances, and bequests are specifically excluded by law 
  • Certain qualified student loan debt 
  • Debt paid by a cash basis 
  • Qualified purchase price reduction 
  • Pay-For-Performance-Success payments under the Home Affordable Modification Program 

The second way is you exclude the canceled liabilities from your gross income, so you don’t pay taxes on it. This includes debts: 

  • Canceled for a primary residence 
  • Canceled because of insolvency 
  • Discharged in a bankruptcy 
  • Canceled for qualified farm loans
  • Canceled on qualified business real estate 

You can only use the exclusions from the second list after you apply the exceptions. If you use exceptions, you must reduce your tax attributes. If you don’t understand what that means, you aren’t alone. You need a good accountant to walk you through the process because it gets confusing quickly.3  

Final Thoughts on the Mortgage Forgiveness Debt Relief Act 

The government implemented the Mortgage Forgiveness Debt Relief Act to help borrowers with underwater mortgages during the housing crisis in 2007. While that crisis is over this issue is still a problem. You should know: 

  • The IRS considers loan forgiveness income for the borrower, so you must report it for your federal income tax  
  • You can avoid the income taxes 
  • Exclusions are complicated, so most people need professional accounting help to take advantage of them 

If your lender forgave some or all your obligations or if a court discharged balances for you during bankruptcy you may be able to avoid income tax. Also, keep in mind that these exclusions are complicated. Unless you are familiar with tax law and accounting you should seek a professional to help you file your federal income taxes appropriately. 


  1. NOLO 
  2. The Balance