Tax on debt forgiveness
Starting Jan. 1, the tax on debt forgiveness has been re-instituted.
Previously, if a homeowner had a mortgage debt that was cancelled or forgiven by the mortgage holder, that amount was not counted as income — and therefore not taxable. (This usually comes about in a short sale or foreclosure when the mortgage holder does receive enough money from the sale of the home to pay off the debt.)
Now, that is no longer the case, and you need to be aware if a 1099-R is issued, you will have to pay taxes on that amount.
A bankruptcy can be of benefit if filed before the issuance of a 1099-R. If a bankruptcy is filed, then the mortgage holder will not be able to have the debt forgiveness considered income, as the entire obligation is eliminated.