How to Get Foreclosure Tax Relief

The tax law states that when a mortgage debt is eliminated through foreclosure, the amount of the debt that exceeds the value of your house or other property is usually considered to be taxable income. However, there is a relief provision that allows insolvent debtors to offset that cancelled taxable income to the extent their liabilities exceed their assets.

Receive Form 1099-C from your lender, which shows the amount of debt forgiven and the fair market value (FMV) of the property given up through foreclosure.

Verify that the information on Form 1099-C is correct. The sale of the property at auction usually determines the FMV of the property. Some circumstances, such as the property not yet being sold by the lender, may result in a higher FMV.

Determine if your property foreclosure eliminated debt exceeded the FMV.

Calculate the total value of all your assets and the total amount of your liabilities. If the liabilities exceed your assets, the amount of that excess can be used to totally or partially offset the excess of forgiven mortgage debt over the FMV of the property.

Request a payment agreement with the IRS if the relief provisions do not entirely offset the foreclosure taxable income. You can also consider making an offer in compromise to reduce the tax liability.

Lenders are required to issue Form 1099-C to the borrower and to the IRS.

Notify the lender as soon as possible if there is any discrepancy in the amounts reported on Form 1099-C.