Are there any federal income tax issues involved with the delinquency process?
One of the most often overlooked details in loan modifications, deeds in lieu of foreclosure and short sales is a borrower’s potential liability for the payment of federal income taxes on the amount of any indebtedness forgiven by the lender. Although a recent change to the Internal Revenue Code provides an exemption from the income taxation of forgiveness of indebtedness related to a personal residence, the amount of any other debt reduction for which the lender agrees not to pursue liability against the borrower is subject to federal income taxation. Therefore, a borrower should seek competent tax advice from an accountant or attorney in such instances.
