Loan Modification Tax Effect

Today TaxMama hears from Janet in the TaxQuips Forum with a quick question.
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“We have applied for a loan modification on our home.  Will that have any affect when we file taxes next year?
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  I’d ask the loan counselor, but they are impossible to reach.”

Dear Janet,

If the loan modification only changes your interest rate, you won’t have any tax issues.

However, if it reduces your loan balance, you may have cancellation of debt income for the amount of the loan you will never have to pay.

There might be some ways around the taxes, if that happens. It’s something that comes up all the time here.  So just search this forum and the TaxMama.
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com site for ‘cancellation of debt’ and you’ll find ways to avoid the tax. 

And remember, you can find answers to all kinds of questions about loan modifications and other tax issues, free. Where? Where else? At

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com link – it’s free!] 

Please post all Comments and Replies in the new TaxQuips Forum .

2 thoughts on “Loan Modification Tax Effect

  1. TaxMama says:

    Hi Jan

    Just put this year’s tax return on extension.
    You have until October to file the return.
    Then, start working.
    Contact your state’s banking commission, consumer affair board, and even your TV consumer affairs person. Getting very, very visible bad publicity will bring a solution sooner.

    Another idea I have heard is to contact your Senator and/or Representative. Get them to help you. BofA is under scrutiny right now, facing a variety of court-ordered payments and remedies. You CAN get some help before it’s time to file in October.

    Of course, you can file now with the information you have – and amend in October when it’s resolved.

    Good luck!


  2. Jan W says:

    I started a home modification with Bank of America 18 months ago. It was finally approved in October 2012, but they have never finalized it. They are holding close to a year of my payments and calling it “unapplied funds”. When I got my interest statement it only showed the normal interest for about one month so basically I have lost the benefits of homeownership. My payment was only cut by $200 a month and that doesn’t even begin to make up for the interest I have lost. As always they just say they are “working on it”. Is there any way that I can take the interest in “unapplied funds” and use it on my 2012 taxes? Is everyone in a modification having this problem? I can see not being able to use the interest on the $200 a month because I’m not even paying it. But how about all the money I have paid and am not being given credit for?

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