Prior to the year 2007 if your home was foreclosed upon, you were responsible for paying taxes on the amount of debt that was owed.

In other words, if you owed $30,000 on your mortgage when your home was foreclosed upon, you would still owe taxes on the full $30,000 even though the bank took your home.  You would receive a form 1099 at the end of the year and that $30,000 would show up as income therefore able to be taxed.

There were very few ways to avoid paying foreclosure taxes.  One of the ways that still applies today is Insolvency.  Basically you are insolvent if your debts are more than the fair market value of all of your assets combined.

Thanks to the Debt Relief act of 2007 debt released due to foreclosure can now be excluded as income.  Using the above mentioned example, that $30,000 will no longer be added to a form 1099 at the end of the year, making it no longer taxable income.

The Debt Relief Act of 2007 was enacted as a direct result of the declining housing values and economic crisis.  This is one way the government has tried to assist the general public. The unemployment rates continue to rise while the values of our homes continue to decline. People are struggling financially just to survive.  Eliminating foreclosure taxes on our homes is a welcomed relief.

This will save millions of dollars for struggling homeowners that are facing foreclosure.  The Debt Relief Act applies to all foreclosures between the years 2007 and 2012.  In order to qualify for this debt relief, the foreclosure has to have been on your primary residence.

The Debt Relief Act does not apply if the foreclosure was on any property or home that was not your primary residence.  In that case the debt would still be considered income and therefore taxable.

Again, insolvency is one of the only ways to avoid paying foreclosure taxes on non-primary residence foreclosures.

There is a limit on the amount of money that can be excluded under the Debt Relief Act.  The maximum amount that can be excluded is $2 million ($1 million if married and filing separately during that tax year).

Even though you will no longer be required to pay foreclosure taxes you must still report the debt owed at the time of foreclosure on Form 982 and attach it to your tax return. This is a requirement and failure to attach Form 982 may result in disqualifying you from the Debt Relief Act.  You may then be responsible for paying the foreclosure taxes. You can find form 982 online by downloading it from the IRS.gov website or calling 1-800-829-3676 to order the form.

If you are trying to exclude paying foreclosure taxes on a non-primary residence and you meet the insolvency option, you too must fill out Form 982.

Keep in mind this relief from foreclosure taxes is only in effect until December 31, 2012. There is no information currently available as to what will happen after that date.