Tax Consequence for the Borrower from Foreclosure Proceedings

What is the income tax consequence for the borrower from a short sale or deed in lieu? This is a question frequently asked by borrowers facing foreclosure. Income tax may be imposed for a cancellation of a debt (“COD”) before Bush signed Foreclosure Tax Relief Bill into law.

Dec 20, 2007, President Bush signed Foreclosure Tax Relief Bill into law. The bill provides tax relief for homeowners facing foreclosure or bankruptcy. The bill eliminates federal taxes due from homeowners who have had mortgage debt forgiven as part of a foreclosure or the renegotiation of a loan. Before this law becomes effective, such debt forgiveness had been treated as taxable income. If your home is a primary residence, you will be covered by this law now. Read more

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