On December 20, 2019, President Trump signed into law the Appropriations Act of 2020. This Act included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017. The Act also included a number of retirement and IRA plan modifications, among other changes. This article is one of a series of articles dealing with those changes and how they may affect you. This article explains that if you paid tax on Home Mortgage Debt Relief in 2018, that you may be entitled to a refund.
Cancellation-of-Debt (COD) Income
Whenever a taxpayer’s debt is forgiven, that forgiven debt becomes taxable income to the taxpayer. Forgiven debt is referred to as cancellation-of-debt (COD) income. This includes whether it is credit card debt, home mortgage debt or auto loan debt. Exclusions include when the debt was discharged in a bankruptcy proceeding. Or if the taxpayer qualifies for one of the tax law exclusions providing relief from taxation of COD income.
The decline in the real estate market in 2008, combined with the recession, left many homeowners upside down. This means their mortgages were significantly higher than the value of their home. As a result, many homes went info foreclosure, abandonment, and voluntary reconveyance, leaving taxpayers with taxable COD income.
Special Rule to Exclude COD Income from Taxation.
To alleviate this situation and relieve homeowners from COD income, Congress created a special rule. The rule allowed taxpayers to exclude COD income from taxation if the income arose from cancellation of the debt used to acquire the taxpayer’s primary residence. This debt is termed acquisition debt. However, this special provision expired at the end of 2017. So anyone facing a similar problem after 2017 were stuck paying taxes on the COD income.
Home Mortgage Debt Relief Retroactively Extended through 2020.
Thankfully, Congress has retroactively extended that special exclusion (home mortgage debt relief) back to 2018 and through 2020. Making it retroactive means if you were required to pay tax on forgiven home acquisition debt income in 2018, then your 2018 return can be amended. As a result, you can recover those tax dollars you paid in 2018.
This exclusion may also apply to home debt discharged as part of the Home Affordable Modification Program (HAMP). Under this program, certain qualifying individuals could have their mortgage debt reduced. This would allow it so they could afford to remain in their homes. Although this program ended in 2016, the debt was forgiven over three years. This means in some cases, taxpayers may have had debt forgiveness (COD income) in 2018. If so, this COD income will probably qualify for income exclusion that will result in a refund of taxes. But only if the taxpayer amends their 2018 tax return.
If you have questions related to home mortgage debt relief or if you paid taxes on home mortgage debt relief in 2018, please give this office a call at (360) 778-2901. Or reach out to us using the contact form below.
If you missed any of the earlier tax law change articles you can view those articles at the links below:
- Mortgage Insurance Premium Deduction Retroactively Extended
- Congress Allowing Higher Medical Deductions for 2019 and 2020
- Employer’s Pension Startup Credit Substantially Increased
- Above The Line Education Tax Deduction Reinstated
Or watch the following video:
Tax Extenders and Tax Return Amendment Opportunities – Video
