The city offers homeowners forgivable mortgage loans funded through the CDBG program for qualifying activities involving home ownership, down payment or rehabilitation of property. Recently, the City's finance department received information during an IRS webinar that said the City is required to issue 1099C forms when a mortgage loan is forgiven, thus reporting the forgiven loan as taxable income for the homeowner. Are we required to report the forgiven loan as taxable if it was funded with CDBG dollars?
Date Published: May 2015
The CDBG regulations permit grantees to decide how to provide CDBG assistance. The CDBG dollars can be provided as a grant or a loan, as an interest reduction or a loan guarantee. When provided as a forgivable loan, the CDBG regulations do not specify if IRS Form 1099C must be issued when the mortgage is forgiven. According to IRS Publication 4861, if a debt for which a person is personally liable is forgiven or satisfied for less than the full amount owed, the debt is considered canceled in whatever amount if remained unpaid. Generally, they must include the canceled amount in their income. If the city’s CDBG mortgages are structured so that they are fully forgiven over a specified period of time, the canceled amount would not be considered taxable income. Homeowners also may be able to exclude the canceled debt. The most applicable exclusion for homeowners with a CDBG funded mortgage would be the Qualified Principal Residence Indebtedness. Homeowners can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage they took out to buy, build, or substantially improve their main home. It also must be secured by their main home. It is recommended that the city’s Finance Department seek advice from a qualified IRS representative for your specific program.