You need to check your loan to see which it is. There are some new laws as of Dec to deal with foreclosures. In general, the home loan you get when you buy a house is nonrecourse. Equity and refinance loans are usually recourse loans. When you lose a house to foreclosure or short sale and it is a recourse loan the lender will send you a 1099C – cancellation of debt. Debt cancellation is taxable income. You also have to adjust the cost basis of your home by the acquisition loss. The new law says that you do not have to pay taxes on the portion of the cancelled debt that is an acquisition loan. You must have really good records or it will all be taxable.

Here is a simplistic example.

John has a home loan for $500k. Of this $400k was used to buy the home. This means $100k is equity loan. The house is sold in a short sale for $350k. The cost basis of his house was 400k. Now it is 350K which is the original $400k minus 50k. (400k – 350k selling price).

The loan was $500 and it sold for 350k. John owes 150k. He will receive a 1099C for 150k. We had a loss of 50k on the house value as acquisition debt. We take the 150k loss and subtract the 50k. John must count $100k as taxable income.

Other effects that may happen. You will probably be required to pay AMT and if so many of your deductions will be reduced or eliminated.

I have a condo and I was almost foreclosed on. Our servicer did a forebearance. Check into that.

DO WHATEVER YOU CAN TO AVOID THE FORECLOSURE OR SHORT SALE.

I hope this isnt too confusing. Email me if you have more questions.