It used to be that after a foreclosure you would be liable for taxes on the amount of your home value that was ‘forgiven’ by the bank.  Normally, forgiven debts are considered as income to the IRS and the deficiency from a home foreclosure was “income” to the owner.  This is attributed to the owner with a 1099-C form.  However, because of the The Mortgage Forgiveness Debt Relief Act of 2007, forgiven debt on a principal residence isn’t taxable if you meet some basic standards.  To qualify:

  1. The forgiven debt must be on your principal residence.  Mortgages on second homes or investment property do not qualify.
  2. No more than $2 million can be excluded from your income.
  3. The loan being forgiven must be secured by your residence.  Home equity lines of credit used to pay debts, buy toys or pay for anything but the home or home improvements don’t qualify.

This means that you might not get hit with taxes on any deficiency that is sent to you by a 1099-C.  If you get a 1099-C after short selling or foreclosing on your primary residence, you will need to file Form 982 to identify that forgiven debt as being foreclosure debt.  Also, there are further defenses to these taxes if you are insolvent at the time of the foreclosure.  For more information, call Ryan at (702) 868-3311.  See also this IRS article on the Act and this publication.