It may come as a surprise to some but if a mortgage lender forgives debt they send the IRS a 1099 with the amount forgiven. The forgiveness could be a part of a short sale or foreclosure or what have you. So, when tax time rolls around you are obligated to report this forgiven mortgage debt as 1099 income and pay tax. Basically, not only are you having a hard time with losing your home, Uncle Sam wants to pile on a bit.

Well no longer. Uncle Sam is changing the rules.

The US House moved closer towards eliminating this tax on forgiven debt. Here is an excerpt from Square Feet Blog:

The House Ways and Means Committee - where federal tax legislation typically starts - unanimously approved the Mortgage Forgiveness Debt Relief Act of 2007 (H.R.‚3648). As the title implies, the primary goal of the proposed legislation is to buffer homeowners who currently face an unwelcome tax bill when lenders forgive some of their loans.

The push for such relief has two important backers: President Bush, who called on Congress to provide help last month, and Ways and Means Committee Chairman Charles B. Rangel, who calls the tax hit a "double whammy" for people who already are losing their homes.

This tax forgiveness is allowed only on primary residences and can not be used for second homes or investment properties.

Arizona Mortgage Guru