If your primary residence is foreclosed upon or sold through a short sale you may have to recognize taxable income for the portion of the loan that is forgiven.
Through 2013, the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the forgiveness of debt on a principal residence.
However, after 2013, debt forgiven related to the principal residence will be considered ordinary income for tax purposes.
Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. She specializes in cases of embezzlement, financial statement fraud, white-collar crime, securities fraud, and family law. Visit her website.