IRS has granted temporary tax relief for debt forgiveness from foreclosures.
Clearly, we are all familiar with the housing crisis of 2007 resulting in a substantial foreclosure of homes. In the past, the debt that was forgiven by Banks or Financial Institutions to the taxpayer(Mortgage Payer) was considered Income!! In fact, a 1099-C was sent to the Mortgage Payer/Taxpayer indicating amount of the debt forgiven. This resulted in additional reportable income to the taxpayer.
A double hit to the taxpayer, one was he lost his or her home and secondly, he was required to report the debt forgiveness as additional income subject to his ordinary tax rate.
Tax Relief Legislation
However, during last year's foreclosure problems, US Congress decided to provide some temporary tax relief by eliminating the provision of treating "debt forgiveness as taxable income." Thus, effective for tax filing for years 2007, 2008 and 2009 debt forgiveness would not be considered income.
Exceptions to the provision
As with all laws, there are some exceptions to this new provision. The lawmakers did not want this "Debt forgiveness provision" extended to speculators and so they have disallowed this debt relief to taxpayers with 2nd Homes or Investment properties.
For the subsequent years after 2009, the old provision would apply in that "debt forgiveness will be considered reportable income".