If anyone has a short sale, foreclosure, or HAMP (Home Affordable Modification Program) loan modification, you may refer to
IRS Publication 4681 which outlines the conditions under which you are not required to pay Federal Income Tax on forgiveness/discharge of "net" mortgage related debt via the IRS Form 1099 you'll receive from the discharge...Yes, the amount (between what the bank gets for the sale of the property and the amount you owed would be their loss) would normally be taxed because it is a "benefit" that you don't owe the debt any longer.
I am not certain this is applicable in the case of Deed in Lieu of Foreclosure,
I believe this exclusion runs to 2013, but consult your tax advisor to be sure.
Since this exclusion of income is only applied for Federal income taxes, I am not sure what impact this law has on State income taxes.
I would like to see the tax burden permanently eliminated if the asset is also disposed, but creates a Moral Dilemma or disincentive for people to take unnecessary risk.
References to products and services are not a specific endorsement, but the user must perform their due diligence and investigate whether the product or service is right for them.
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