A taxpayer who disposed of his or her home in 2017 in a short sale had to recognize up to $1 million in cancellation of indebtedness income.

Question

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The Mortgage Forgiveness Debt Relief Act of 2007 allowed taxpayers to exclude up to $2 million of cancellation of indebtedness income related to a qualified principal residence through December 31, 2016. However, this exclusion expired at the end of 2016 and was not extended, so any cancellation of indebtedness income related to a qualified principal residence after 2016 would generally be taxable as ordinary income unless an exception applies.

A Taxpayer Who Disposed of His or Her Home in 2017