Foreclosure

If any part of your debt is forgiven as part of a loan modification, short sale, deed in lieu of foreclosure or a foreclosure sale, you would normally have to consider the amount forgiven taxable income. However, as long as you used the debt to buy, build or improve your primary home, you don't have to pay tax on the forgiven debt.

The amount of the forgiven debt will be reported to the government via Form 1099-C. The bank will send you a copy. Call the bank if you don't receive the form by the end of the succeeding February.

You, the taxpayer, report the cancellation of debt on Form 982. (NOTE: reporting the cancellation does not make it taxable. Whether it is taxable or not depends on the circumstances as noted above).

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