Mortgage Cancellation of Debt Exclusion Reduced for 2021-2025

Services for Real Estate Pros with Richardson Accounting and Tax


The IRS has extended for years 2021-2025 the cancellation of debt (COD) exclusion related to a qualified principal residence mortgage. Mortgages used to buy, build or improve a taxpayer’s main home will qualify. The mortgage must secure the property. A refinancing is also valid as long as it was used to buy, build or improve the main home and the dollar value of the refinanced mortgage does not exceed the old mortgage principal prior to the refinancing.    


The limit for this type of cancelled debt exclusion from income is $750,000 ($375,000 for married filing separately), down from the previous $2,000,000 ($1,000,000 for married filing separately).


Cancellation of debt (COD) income related to real estate can be created from a foreclosure, short sale, deed in lieu of foreclosure, abandonment, etc. This is also common for delinquent credit card debt. Form 1099-C is issued by the creditor and sent to the borrower with all of the information related to the cancellation of debt. If the amount of cancelled debt on a principal residence mortgage is greater than the new exclusion limit, the borrower may have to include in income the difference between the cancellation of debt (COD) and the exclusion limit. It can get complicated determining whether to include the cancellation of debt (COD) in income due to other factors such as bankruptcy, insolvency, farm debt and non recourse debt, so be careful when filing your tax return. 

Posted by

Howard Richardson

Enrolled Agent

IRS and State Tax Representation

(213) 545-1799

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