Tax Costs of Mortgage Default

Abstract

This paper contains a discussion of the tax consequences to a mortgagor from foreclosure and subsequent cancellation of mortgage indebtedness by the mortgagee. Most likely, many mortgagors are unaware that default on any indebtedness exposes them to a potential tax on the deemed income. As shown in this paper, the tax consequences from foreclosure pose a significant cost that should be evaluated when making a decision to default on a mortgage. Also, several options available to a taxpayer to exclude the debt cancellation from income are discussed.