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@rose323 wrote:

Thank you. Is the payoff amount wholly absent from the return? If so, may I have a reference or article to refer to if the client asks why? 

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It might help to think of some hypothetical examples.

Let's say taxpayer A buys a house for $100,000, in cash (no mortgage).  The next day, he sells it for $100,001 (no mortgage to pay off).  He would have a taxable gain of $1.

Now let's say taxpayer B buys a house for $100,000, with a $100,000 mortgage.  The next day, he sells it for $100,001 (and pays off his $100,000 mortgage).  If the mortgage payoff was a deduction, that would mean there would be LOSS of $99,999.  That doesn't make sense, right?