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Notice 2016-72: Discharge of qualified principal residence indebtedness

Discharge of qualified principal residence indebtedness

The IRS today released an advance version of Notice 2016-72 providing guidance concerning the discharge of qualified principal residence indebtedness that is initiated in 2016 but not completed before 2017.


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The PATH Act (Protecting Americas from Tax Hikes Act of 2015) extended for two years—generally from January 1, 2015, through December 31, 2016—a provision that allows for the exclusion of income from the discharge of qualified principal residence indebtedness (with a modification for discharges pursuant to a binding written agreement entered into before January 1, 2017).

Notice 2016-72 [PDF 79 KB] clarifies that qualified principal residence indebtedness is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2017, if:

  • Before 2017, a mortgage servicer sends a borrower-homeowner (the taxpayer)—under the Federal Housing Finance Agency’s (FHFA’s) principal reduction modification program (PRMP)—a notice in conjunction with a written trial period plan (TPP) or, for a taxpayer in an active TPP, a separate notice in a written opt-out letter outlining the terms and conditions of the permanent mortgage loan modification following completion of the active TPP;
  • The taxpayer satisfies all of the TPP and PRMP conditions; and 
  • The taxpayer and mortgage servicer enter into a permanent modification of the mortgage loan on or after January 1, 2017.

Today’s guidance also applies to a TPP under the home affordable modification program (HAMP).

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