My mortgage company offered us a deal where we would pay off a second mortgage that we had with them for a smaller amount. I received a cancellation of debt form from them. It states the amount of debt cancelled in box 2 and they call it a credit loan in box 4. Does this have to be added to our income or not?

ANSWER

The BIDaWIZ Team's Answer:

If we understand the situation correctly, the lender agreed to modify the terms of the loan to a reduced amount? If that's the case, then they are effectively cancelling a portion of the debt owed to them. Generally, when debt is cancelled, it is considered income to the taxpayer or borrower. However, the Mortgage Forgiveness Debt Relief Act was recently extended. This allows homeowners to exclude the income realized as a result of the cancellation of debt on their mortgage. So, no you don't have to include the income on your tax return.