Mortgage Foreclosure and Discharge of Indebtedness Income
A mortgage foreclosure may result in federal income tax consequences, including an issue of "discharge of indebtedness income." Discharge of indebtedness income is a tax law where the amount of an unpaid loan is treated as taxable income. A mortgage lender may report the amount of the unpaid mortgage loan to you and the IRS on a Form 1099-C, Cancellation of Debt.
Fortunately, though, there are various exceptions to the application of this rule. One exceptions is if the mortgage debt is discharged in bankruptcy. Another exception is the insolvency exception which applies generally if your total debts is more than the fair market value of your total assets.Another exception was added in 2007 which generally allows people to exclude certain discharge of indebtedness from the foreclosure or mortgage restructuring on their principal residence. This new provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
Fortunately, though, there are various exceptions to the application of this rule. One exceptions is if the mortgage debt is discharged in bankruptcy. Another exception is the insolvency exception which applies generally if your total debts is more than the fair market value of your total assets.Another exception was added in 2007 which generally allows people to exclude certain discharge of indebtedness from the foreclosure or mortgage restructuring on their principal residence. This new provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).