Facing Foreclosure and a Subsequent Tax Bill in Arizona? You May Not Need to Worry.

Are you facing foreclosure?  You may be aware by now that the law has required your lender to issue a 1099 showing any "forgiven" debt.  Forgiven debt is the debt the lender may write off or walk away from if the home was worth less than they were owed. 

This has meant that the forgiven amount had to be included on your tax return as income. 

There has always been two exceptions to this "rule".  Generally, they are that you were "insolvent" at the time this happened (i.e. your assets were worth less than your debts), or 2) it happened during a bankruptcy. 

There is now a third, limited exception, thanks to the Mortgage Forgiveness Debt Relief Act of 2007. 

To the extent that the debt went into purchasing or improving your personal residence, not taking a trip or buying a car, it will now be excluded from the personal income definition for the years 2007, 2008 and 2009.