top of page


  • Writer's pictureSang Han

Even if you proceed with foreclosure, taxes may follow

I thought that if I failed to pay the mortgage and went through foreclosure, all the debts related to the mortgage would be gone. But today, after reading an article on, I learned something new and want to share it with my customers.

First of all, everyone knows about foreclosure, right? If the landlord is unable to repay the mortgage loan, the bank that issued the loan forecloses the property, sells it, and pays for the damage.

Therefore, if you proceed with foreclosure, of course the debt with the bank will be settled.

But, what kind of organization is the IRS? Of course, we have to pay taxes on this part. In other words, the amount of mortgage forgiven through foreclosure is set as income and tax is imposed on it. Usually, if you do a foreclosure, you will receive a 1099-C (Cancellation of Debt) from the bank that held the loan. The amount of canceled debt listed here is income.

However, there may be instances where you may not have to pay this tax.

Mortgage Debt Relief Act

At the height of the subprime mortgage crisis, the government passed the Mortgage Debt Relief Act, a bill that prevented taxation by setting mortgages that became unpaid through foreclosures as income. And this bill was originally only valid until 2020, but it is said that the agenda that extends it until 2025 has also been passed.

To be eligible for Mortgage Debt Relief, you must meet the following two conditions:

It means that the property must be for principal residence, i.e. for actual residence.

Second, the amount of debt forgiven cannot exceed $750K.

However, even if the house undergoing foreclosure is not for actual residence, there is a way to avoid tax. It's not just by doing foreclosure, you have to file for bankruptcy. Then, you can get a tax exemption on the forgiven debt.

As you know, I am a realtor, not a CPA. So what I shared today may be very superficial. For additional questions related to real estate tax, we recommend that you consult with a CPA or accountant.

See you next time with more helpful articles.

6 views0 comments


bottom of page