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ARTICLE · 03 JANUARY 2023

Restructuring Mortgage Debt? Watch Out For COD Income

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In tough economic times, real estate owners and investors often work with their lenders to restructure mortgage debt. Lenders may be willing to reduce the interest rate, extend the repayment term...

United StatesReal Estate and Construction
Jeffrey Newman
Jeffrey Newman
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In tough economic times, real estate owners and investors often work with their lenders to restructure mortgage debt. Lenders may be willing to reduce the interest rate, extend the repayment term or even forgive a portion of the debt. These modifications can provide welcome financial relief, but it is important to understand the tax implications. Any time a lender reduces your principal balance, lowers your interest payments or gives you more time to pay, you may have cancellation of debt (COD) income, which is reportable as ordinary income on your tax return.

Not every modification of a mortgage loan triggers COD income, however. There are a number of exceptions and exclusions that may allow you to avoid or defer COD income. For purposes of this discussion, several exclusions may be relevant:

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