What does foreclosure mean for my taxes?

If your lender allows you to engage in a transaction like a “short sale,” and then agrees to cancel or forgive a part of any deficiency amount on the loan that is not covered by the sale price of the property, it could mean income taxes for you.  When you first receive loan proceeds, tax law treats you as receiving debt, not money, but you get taxed later, when you sell property.  Tax law also treats a foreclosure as a sale of the property, and the cancellation of indebtedness as income.  If more than $600 is cancelled, you’ll receive a 1099 form, which may show regular income in the total amount cancelled.  However, several exceptions may relieve you of the need to declare regular income:  1) If the debt was certain farm or small business debt; 2) If the home was your principal residence; 3) if you were insolvent when the debt was cancelled; or 5) if the cancellation resulted from certain bankruptcy court orders.  Federal tax laws are complex and can change every year, so be sure to consult with a tax attorney or accountant.