From the Document: "Historically, if a lender forgives or cancels mortgage debt (and most other debts), tax law has treated the amount of canceled debt as a cancellation of debt income (CODI) subject to ordinary income tax rates. Section 108 of the Internal Revenue Code (IRC) contains two exceptions that are particularly relevant in the case of canceled home mortgage debt: a borrower may exclude canceled debt from gross income if (1) the debt is discharged in Title 11 bankruptcy; or (2) the borrower is insolvent (that is, has liabilities that exceed the fair market value of his or her assets, determined immediately prior to discharge). These exceptions are permanent tax provisions. Near the beginning of the housing downturn and Great Recession, Congress enacted a temporary provision that provided distressed borrowers another option for excluding canceled mortgage debt. This provision has been extended a number of times since its original enactment, most recently by the Consolidated Appropriations Act, 2021 (P.L. 116- 260), which extended it through the end of 2025. The latest extension also reduced the maximum amount of debt that qualifies for the exclusion. This In Focus provides a brief overview of the tax treatment of canceled mortgage debt."
CRS In Focus, IF11535
Congressional Research Service: https://crsreports.congress.gov/