Will I be taxed on forgiven debt?

 
When a lender forgives or cancels debt, this considered income, thus creating a tax liability for the borrower.  If a mortgage lender accepts less than what is owed, the IRS tax code mandates they issue a 1099 for the cancelled portion of the debt.
 
The taxable income is the difference between the property value and the balance of the mortgage loan on the date you surrender the property to the bank.  This is imputed income or “phantom income” resulting from the amount of the debt reduction.  The Mortgage Forgiveness Debt Relief Act of 2007 exempts owner occupant homeowners from owing taxes on cancelled debt resulting from a short sale or deed in lieu of foreclosure.
 

If you have any other questions about a forgiven debt, please contact us.