Did you have a short sale or let your home foreclose in 2014? Did you negotiate a settlement with your lender? If so, you may be eligible for a tax exemption.
The amount you owe, but don’t have to pay back, is considered forgiven debt. The IRS considers forgiven debt taxable to you as ordinary income. The law that created the tax exemption is called the 2007 Mortgage Debt Relief Act. It was extended several times and finally expired on January 1, 2014. Or so we thought. Congress recently, meaning the end of December, 2014, passed a law that extended this tax exemption to cover all of 2014.
Therefore, don’t pay taxes that you don’t owe. The IRS certainly will not alert you to this potential tax savings, so you need to figure out if you qualify and file the proper exemption form with your 2014 tax return.