After foreclosure - can we be taxed on deficiency amount?

[researchnerd]

Our Ch7 was discharged in November of 2010, and our mortgage was IIB. We haven't lived in the house for almost two years. A month or so after discharge we got a foreclosure notice...but then it didn't happen. A couple of months later, we got another foreclosure notice...and again, nothing. Lather, rinse, repeat.

In October of 2011, they finally got around to foreclosing on the house. We received no notice of this after the fact. (Would't you think they'd at least have to send a letter? That just seems inconsiderate.) The only way I found out was that my insurance agent called in early December to say they'd received a request to cancel the homeowner's insurance in January.

I did some searching online and found the county public records, which showed that the foreclosure sale amount was about $80k less than our last known balance on the loan. Since our mortgage was IIB, I know we are protected from having to pay the deficiency amount. But I don't remember - can we be taxed on that amount as income? It doesn't seem right since we didn't gain from the transaction financially, but you never know.

[justbroke]

No, you can't be taxed. However, you may receive an IRS Form 1099-A or 1099-C. If you do, you just file an IRS Form 982 to deal with any affects of the taxes on any capital gain. (A gain is usually the case when the debt forgiven is more than the value of the property.) While you can do this all yourself, I suggest you seek an experienced tax preparer to do your taxes if you get a Form 1099-C. Make sure you inform whoever prepares your taxes that you received a discharge of the debt.