IRS site explains double whammy of foreclosure, taxes

The Internal Revenue Service has created a section on its website to explain the tax consequences for people who have lost their homes to foreclosure.

Some homeowners work out arrangements with their lenders to forgive some of the debt. But what the lender forgiveth, the IRS taketh away. The site offers this simplified example: Say you borrowed $10,000 and defaulted on the loan after paying back $2,000. If the lender cannot collect the remaining debt from you, there is a cancellation of debt of $8,000. The IRS then generally regards that $8,000 as your taxable income.

But there are some exceptions, which the IRS explains on the new section of its site.

For more information, go to www.irs.gov, and in the search feature type in: “Questions and Answers on Home Foreclosure and Debt Cancellation.”

The whole thing may be rendered moot, however. The U.S. House of Representatives recently passed a measure to prevent the IRS from taxing any of the forgiven debt. It now moves to the Senate for consideration.