Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows debt forgiven as a result of a foreclosure to be excluded as taxable income. The Act applies to debt forgiven in years 2007 through 2012.
The amount of the forgiven debt must be reported on your income tax return. Homeowners who are forgiven debt as a result of a foreclosure should be issued a Form 1099-C by the bank that held the mortgage. For more information, see the IRS website or contact your tax return preparer.