What is the Mortgage Cancellation and Debt Relief Act

The Mortgage Cancellation and Debt Relief Act was a Federal law passed in 2007 to assist borrowers who have had their mortgage cancelled. The act saved these borrowers from additional tax penalties. 

How the Mortgage Debt Relief Act Works 

Ordinarily, if a lender cancels or forgives any of your loans before they are fully repaid, you have to report the remaining balance of that debt as income on your next tax return and pay taxes on this extra income. The Mortgage Cancellation and Debt Relief Act exempts any cancelled debts for a mortgage or a major home improvement loan or for a loan designed to refinance a previous mortgage. You must still report this amount, using IRS Form 982, but you would not be taxed for it. 

Limits to the Mortgage Debt Relief Act 

The Mortgage Cancellation and Debt Relief Act applies only to loans on your primary residence. If your cancelled mortgage was for a second home, you will still need to report the balance of this cancelled debt on your tax return. Also, the act protects a maximum of $2 million ($1 million if you are married and you and your spouse file separate returns). Finally, the Mortgage Debt Relief Act at present covers only loans cancelled between 2007 and 2012.

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