Losing A Property Thru Foreclosure Can Possibly Increase Your Income Taxes

If you lost your home to foreclosure or a short sale (with the lender agreeing to accept sales proceeds that are short of what's owed on the mortgage), that unpaid debt is technically considered income to you. For the tax years 2007 through 2012, the government is waiving any tax liability on that phantom income. The lender will send you - and the IRS - a copy of Form 1099-C, "Cancellation of Debt," reporting that forgiven debt as income. To make sure you are not taxed on the amount, you will have to file Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness." (Forms can be downloaded from www.IRS.gov.) If you've lost a home to foreclosure, be sure the bank and IRS have your current address (notify the IRS by mailing in Form 8822) so you receive important notices promptly. This year-old change to the tax laws will affect more people this year, thanks to soaring foreclosure rates. Forgiven debt on vacation homes and rental properties is still taxable as if it were income.

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