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Rob Andrews

Forgiven debt has bad side: huge tax

For homeowners around the country who are seriously delinquent on their mortgages and hoping for relief, the IRS has bad news: If your lender agrees to modify your loan and forgive any part of your debt, you could owe federal income taxes on the amount forgiven.

Think of it as the tax code's "kick-'em-while-they're-down" rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code unless the taxpayer is insolvent or bankrupt. Worse yet, the lender is required by law to report the amount canceled to the IRS.

Ouch! This is especially bad news for the growing numbers of credit-impaired subprime...