Tax Implications of Mortgage Principal Reduction in Return for Prepayment

  • June 24, 1983
  • • Written by: Patricia M. Rudolph

Spring/Summer 1983, Vol 8, No 1

Abstract: Many mortgage lenders are offering borrowers a reduction in the principal on their mortgage to encourage prepayment. This reduction in the principal is considered forgiveness of debt and is taxable income to the borrower. In making the decision to prepay, an individual should weigh the benefits against the costs, and both must be put in after-tax terms. A simple example of the calculations involved in weighing the after-tax costs and after-tax benefits of prepayment in return for reduction in the balance outstanding is presented.