Money Girl Q&A: Are Unpaid Mortgage Payments Tax Deductible?
Unpaid payments and taxes are never deductible, but there is a temporary exemption you can take advantage of. Money Girl explains another nuance of tax law.
Laura Adams, MBA
Q. Can I claim a deduction for mortgage interest and real estate taxes even if I stopped paying my mortgage? I’m thinking that if the bank ends up canceling my mortgage debt, I’ll have to pay tax on the whole amount. So wouldn’t it be best to take every possible deduction now?
Answer. You can only claim a tax deduction for expenses you actually paid—therefore, unpaid payments and taxes are never deductible. Normally, forgiven or canceled mortgage debt is taxable; however, there’s a temporary exemption you can take advantage of.
Under the Mortgage Forgiveness Debt Relief Act of 2007, you can exclude debt on your main home that’s partly or entirely forgiven—but just through the end of 2012. This applies to debt forgiven through a modification, short sale, or foreclosure—as long as the funds were used to buy, build, or improve your home. Money you took from a home refinancefor another purpose (like to pay a credit card or buy a car) doesn’t qualify for this exemption.
Read What You Need to Know About Forgiven Debt and Taxes to learn more.
Watch a video about who’s eligible to claim the mortgage interest deduction and get answers to several common questions: Mortgage Interest Deduction FAQ.
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.