The Blog

DO I OWE THE IRS TAXES ON FORGIVEN DEBT?
Generally, no (thanks to Congress passing the Mortgage Debt Relief Act in 2007). It used to be the case that if you did a short sale or were foreclosed on, any forgiven debt would be taxed as income by the IRS, even though you would not see a penny of it in your pocket. Since passage of the Act in 2007, however, this is no longer the case for many. Unless you had a large cash-out refinance, where the money taken out was not spent on home improvements, or if your forgiveness was over $2 million dollars (and even if it was you are only taxed on forgiven debt over that amount), or if the forgiveness was for a second home, rental property or a vacation home, you owe nothing to the IRS on this “income.” Of course, you should always consult a qualified tax attorney or professional to get advice regarding taxes. More information can be obtained by ordering a free copy of IRS publication No. 4681, “Canceled Debts, Foreclosures, Repossessions and Abandonment,” available for download at irs.gov, or by calling (800) 829-3676.