How Does A Foreclosure Affect My Taxes?

Filed in archive Information About on May 28, 2010

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If you have lost your home due to foreclosure, you may be able to qualify in such a way that no taxes will be owed on that debt forgiveness. The Mortgage Debt Relief Act of 2007 lets homeowners who lost their principal residence through foreclosure not have to pay taxes on the forgiven debt amount. The Act applies to homes that had debt forgiven from 2007 up through the year 2012.

The Act requires that it must be a principal residence and not a second home or a vacation home. It also is limited up to $2 million of forgiven debt for a couple, and up to $1 million if filing separately. If you went through a restructuring of your mortgage on your principal residence, this will also qualify.

This only applies to forgiven debt on your residence. That means that if you have other debt that was forgiven, such as for a car, then you will be required to file that debt forgiveness on your income taxes. The IRS says that most likely, the lender filed a 1099-C on the canceled debt, and you will be required to pay taxes on other forms of forgiven debt.