If your mortgage debt has been partly or entirely forgiven, you may be able to exclude the forgiven debt from your income.
Normally, the amount of debt forgiven by a lender must be reported on your tax return as income. But, because of a special tax relief program, in general, you will not have to report as income mortgage debt on your home that was forgiven or reduced by the lender.
This includes mortgage debt that was forgiven or reduced by a mortgage work-out, short sale, or foreclosure.
This tax relief is only available on mortgages taken out to buy, build, or improve your home, and it is only available for debt that was forgiven in the years 2007-2013.
There’s also a limit on how much forgiven debt can be excluded from your income.
If you qualify, just fill out Form 982 and attach it to your tax return. See the instructions for Form 982 for more information, including information on restrictions that apply.
A word of caution: most other kinds of debt are not eligible for this relief, and special rules and limitations apply. So before you claim this tax relief, check out the details on IRS.gov.