What is the Mortgage Forgiveness Debt Relief Act?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 September 2019
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The Mortgage Forgiveness Debt Relief Act is a 2007 law passed by the United States Congress at the urging of President George W. Bush. The law allowed a temporary change to taxation laws regarding forgiven debt or the refinancing of a home. Under previous statutes, taxpayers who had debt forgiven through bankruptcy or refinancing had to pay income taxes on the forgiven amount. With the passage of the law, this type of taxation was temporarily suspended in many cases.

The reasoning behind the Mortgage Forgiveness Debt Relief Act of 2007 is relatively simple. Generally, people declaring bankruptcy or choosing to refinance a primary residence do so as a reaction to financial strain or crisis. In 2007, with the housing market collapsing throughout the United States, many homeowners and debtors were forced into foreclosure, bankruptcy, and refinancing as a result of soaring interest rates and declining employment. In order to reduce additional tax strain on people already struggling to shoulder debts, the law put a stop to income tax levied on some types of forgiven debt.


This law covers only certain types of canceled or modified debt. In general, the debt in question must be from loans used to purchase, improve, or refinance a principal residence. The debt relief does not extend to rental properties, nor to property used as a secondary or vacation home. Credit card, student loan, and automobile loan debt canceled through bankruptcy or refinancing may or may not qualify, depending on the specific type of loan and forgiveness program used.

In addition to limitations on the type of debt covered by the law, the Mortgage Forgiveness Debt Relief Act also has a maximum amount that can be excluded from income tax. Refinance or forgiven debt up to $2 million US Dollars (USD) may qualify for exclusion, but amounts in excess of this number may be taxed as usual. For married people filing separate tax returns, a reduced maximum of $1 million USD applies.

Originally, the law extended the tax exclusions until the year 2009. In 2008, as the financial crisis began to fully take hold of both the American and global economies, Congress moved to extend the protections of the law for a longer period. The Emergency Economic Stabilization Act of 2008 included a variety of new provisions to help bring stability to the US market, as well as extending the Mortgage Forgiveness Debt Relief Act through 2012.


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