Mortgage Forgiveness Debt Relief Act: Current 2026 Rules

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The Mortgage Forgiveness Debt Relief Act is often described as if it were one temporary rule that simply expired. The history is more layered. Congress enacted the original law in 2007, later laws extended and modified the exclusion, and the current Internal Revenue Code contains a cutoff with a written-arrangement rule that can still matter for a discharge occurring in 2026.

The subject is federal income tax. State treatment of canceled mortgage debt may conform to federal law, depart from it, or use a different date, and this article does not treat the federal exclusion as a state exclusion.

The 2007 Act created a narrow exception to canceled-debt income

Federal gross income generally includes income from the discharge of indebtedness. In ordinary terms, cancellation-of-debt income can arise when a creditor releases a debtor from repaying an amount that otherwise remained owed.

Public Law 110-142, enacted on December 20, 2007, added qualified principal residence indebtedness to the exclusions in section 108. The original Act applied to qualifying discharges from January 1, 2007 through December 31, 2009. Congress later extended the sunset several times, and legislation enacted in 2020 extended the current version through 2025 while reducing the debt ceiling for the post-2020 period.

The phrase “Mortgage Forgiveness Debt Relief Act” therefore describes the originating statute, not a complete statement of today’s rule. The operative law in 2026 is the current text of section 108(a)(1)(E) and section 108(h).

A 2026 discharge can qualify only through the pre-2026 written-arrangement path

Section 108(a)(1)(E) now has two timing paths. The first covers qualified principal residence indebtedness discharged before January 1, 2026. The second covers debt discharged subject to an arrangement that was entered into and evidenced in writing before January 1, 2026.

As a result, the calendar year of discharge does not provide the whole answer. A discharge completed in 2026 can remain within the federal provision if it occurs under a qualifying written arrangement made before the cutoff. By contrast, a discharge completed after 2025 under an arrangement first entered into after 2025 is outside this principal-residence exclusion.

The statute requires both entry into the arrangement and written evidence before the deadline. Informal discussions, an application, or negotiations are not automatically the arrangement described by the statutory text.

Only acquisition-related debt on one main home fits the definition

Qualified principal residence indebtedness generally means debt secured by the taxpayer’s principal residence and incurred to buy, build, or substantially improve that residence. A refinancing can qualify only up to the principal balance of qualifying debt immediately before the refinancing.

Cash taken from a refinancing for credit cards, tuition, a vehicle, ordinary living expenses, or another nonqualifying purpose does not become qualifying principal-residence debt merely because the mortgage secures it. When a loan contains both qualifying and nonqualifying debt, section 108(h) uses an ordering rule that applies the exclusion only after the canceled amount exceeds the nonqualifying portion.

A principal residence means the taxpayer’s main home, not every residence owned. The canceled debt must also be connected to a decline in the home’s value or the taxpayer’s financial condition; debt canceled for services performed for the lender or another unrelated factor does not fit this exclusion.

The limit changed after 2020

For the current post-2020 version, the maximum amount treated as qualified principal residence indebtedness is $750,000, or $375,000 for a married individual filing separately. The limit concerns the amount of debt that can carry the statutory classification, not an automatic promise that every canceled dollar below that ceiling is excluded.

Qualification still depends on the debt’s use, the security interest in the main home, the reason for cancellation, the timing rule, and the ordering rule for mixed debt. Amounts outside the residence exclusion may still be tested under another Code provision, but they do not become excluded merely because part of the mortgage qualifies.

Bankruptcy and insolvency are different exclusions

Section 108 separately addresses debt discharged in a title 11 bankruptcy case and debt discharged while a taxpayer is insolvent. Insolvency generally measures how much liabilities exceed the fair market value of assets immediately before the discharge, and its exclusion is limited to that amount.

The statutory coordination rules give the title 11 exclusion priority when the discharge occurs in bankruptcy. For qualified principal residence debt outside bankruptcy, the residence exclusion ordinarily takes priority over insolvency unless the taxpayer elects to apply the insolvency exclusion instead.

These alternatives matter in 2026 because expiration of the residence provision for a new post-cutoff arrangement does not repeal the separate bankruptcy or insolvency provisions. Each has different requirements and consequences.

Form 1099-C and Form 982 serve different purposes

An applicable creditor generally reports cancellation of $600 or more on Form 1099-C. Receipt of that form documents information reported by the creditor, but it does not itself establish that the entire amount is taxable or excluded.

Form 982 reports a qualifying exclusion. For the principal-residence provision, the instructions identify line 1e for the exclusion and line 2 for the excluded amount. If the taxpayer continues to own the residence, section 108(h) and the form instructions require a reduction of the home’s basis, but not below zero, generally reported on line 10b.

Reducing basis can affect a later disposition calculation. That is distinct from the mortgage interest deduction, which concerns interest paid rather than principal a lender canceled.

Foreclosure can create two separate federal calculations

A foreclosure, deed in lieu, or short sale can involve a disposition of the home and cancellation of remaining debt. The disposition side may produce gain or loss, while the debt-cancellation side asks whether an unpaid balance became cancellation-of-debt income and whether section 108 excludes it.

Excluding canceled debt does not erase the separate disposition analysis. Readers seeking the broader property-sale framework can review this explanation of capital gains tax on a home sale.

Federal relief does not establish the state result

Section 108 controls federal gross income. A state can use federal taxable income as a starting point yet decouple from a particular federal amendment, adopt it on a different date, or require a separate adjustment.

For that reason, the presence of a federal Form 982 exclusion does not by itself prove that the same amount is excluded from state taxable income. A concrete state result requires that state’s current statutes, conformity provisions, forms, and revenue-department guidance.

Sources

• 26 U.S.C. § 108, income from discharge of indebtedness
• 26 U.S.C. § 61, gross income defined
• Mortgage Forgiveness Debt Relief Act of 2007, Public Law 110-142
• IRS Publication 4681, Canceled Debts and Foreclosures
• IRS Instructions for Form 982
• IRS Instructions for Forms 1099-A and 1099-C
• IRS Publication 544, Sales and Other Dispositions of Assets
• Public Law 116-260, section 114