Losing your home to foreclosure doesn't necessarily wipe away your responsibility to pay your mortgage. According to Bankrate.com, any balance left over after the sale of your home is still yours to pay. If you can't repay your mortgage balance, the bank has the option to write off the mortgage deficiency as a tax loss.
Significance
When any creditor claims a bad debt deduction on its business taxes for a debt you failed to pay, the IRS requires you to include the written off amount in your income. This results in you paying taxes on the entire forgiven debt. The Mortgage Forgiveness Debt Relief Act of 2007, however, may protect you from paying taxes on forgiven mortgage debt.
Features
If your foreclosed home was your primary residence and the bank wrote off less than one million dollars in mortgage debt, you qualify for debt relief. Even if you do not qualify under traditional standards, if your total debts exceeded your assets when you incurred the debt, you may qualify for partial or complete tax debt relief due to insolvency.
Considerations
To claim debt relief under the act, you must fill out lines 1e and 2 on Form 982 and submit it with your tax return. You do not need to fill out the entire form. Mortgage debt relief from the IRS is only available through December of 2012.
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