A taxing foreclosure woe.

 Losing your home because you've lost your job, or can't make higher payments as your loan "adjusts" can be devastating. Whether you lose your home to foreclosure by the lender, or the lender agrees to accept a "short pay" on your home, which means that the value of your home is less than the loan amount, Uncle Sam will be around to add to your misery. Eventually you'll receive a "1099 shortfall" form from the IRS which treats "forgiven" debt as income, even thought you have nothing to show for this "windfall". Basically the loan company informs the IRS it has lost money on your loan. Then IRS says, great we'll just tax them because we can and we'll call the "forgiven debt" income! If you can't afford to keep your home, rarely do you have thousands stashed in the Cayman  Islands to hand over to the IRS for your "I-never-saw-a-penny-of-it" income. There are a few ways to fight this tax. One is to hire a good tax person to fill out a form 982 to show how insolvent and debt ridden you were when you lost your home. Two, you could ask the lender to review the debt, as they could have resold the home for more than they estimated, or the appraisal during the default period could have been at your loan value even though they weren't able to sell it for that. Three you could file for bankruptcy the same year as the loan is forgiven, really not a preferred method. Four, and this is your best bet, the tax law could be suspended for a year or two, when it applies to your primary residence, if President Bush's proposal to do this goes through