You owe taxes if your creditor forgives a loan!

I just saw this column by Kenneth Harvey at the Washington Post. He talks about how the IRS penalizes folks when creditors forgive loans. A foreclosure or short sale on a home is such a situation and you could end up with a large tax bill. Here is an excerpt:

Think of it as the tax code’s “kick ‘em while they’re down” rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code, except in some situations such as insolvency. Worse yet, the lender is required by law to report the canceled amount to the IRS.

Read full article here.

Dan Green, from The Mortgage Report has a complete breakdown of how this applies if you do a short sale or foreclose on a loan. There is hope though. According to Dan there a bill which will amend this rule. Read Dan’s analysis here.

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