"Beginning on Jan. 1, people who lose their home to foreclosure will be required to pay federal taxes on any unpaid mortgage the bank can't recoup through an auction. The same will be true for homeowners whose loan principal is reduced by a mortgage modification, with the wiped-out loan being treated as taxable income.
The new tax obligation will hit because the Mortgage Forgiveness Debt
Relief Act expires at the end of the year. The 2007 law was passed to
save struggling homeowners from getting whacked twice, first by the
sagging housing market and second by the Internal Revenue Service. Its
expiration could push more people to remain in homes worth less than
their mortgages, slowing the housing market's recovery.
"The housing market is in its first stages of recovery, making now
the worst time to take this exemption away from homeowners," Rep. Jim
McDermott (D-Wash.) told HuffPost. McDermott has introduced one of the
bills geared toward extending the exemption."