Are Mortgage Modifications Taxable?
Are there tax implications for doing a mortgage modification?
Laura Adams, MBA
Ask Money Girl: Are Mortgage Modifications Taxable?
Ask Money Girl: Are Mortgage Modifications Taxable?Q. It took a couple of months, but my wife and I were finally approved for a mortgage modification. Then I thought about the taxes. Will we end up taking a tax hit for getting the modification?
Answer. When a lender modifies your mortgage they can reduce your interest rate, extend the length of the loan, or do both, in order to reduce your monthly payment. Your total outstanding debt remains the same — it’s just restructured in a way that’s more affordable for you on a monthly basis. That reduces the likelihood that you’ll default on the loan and that the lender would have to foreclose on the property. Since your total amount of debt isn’t reduced by doing a loan modification, you’ll be glad to know that there is no tax liability for completing one.
Here’s an example: Let’s say you owe $200,000 on a 20-year interest-only mortgage at a rate of 6%. Your monthly mortgage payment would be $1,000. If your lender modified your loan to a rate of 4.5%, your new monthly payment would be $750. You still owe the lender $200,000, but the terms of the loan have been modified in your favor.
Mortgage image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.