Determining Liability

• Your tax liability for the remaining mortgage balance on an abandoned property depends on the type of loan. If you secured your home through a mortgage loan that you were personally liable for, this is considered a recourse debt. Your liability for the unpaid mortgage continues even after you give up use and possession of the home. If you borrowed money to purchase a home but you were not personally liable for the loan, this is considered a nonrecourse debt. In this situation, the mortgage lender is barred from pursuing you for the remainder of the loan.
  
  

Tax Reporting

• If you abandon a property secured by a recourse loan and the lender agrees to cancel the remainder of the mortgage, you must report the forgiven debt as taxable income. Your mortgage lender will issue you a Form 1099-A, which is used to determine the amount of gain or loss realized through the abandonment. You should also receive a form 1099-C, which is required for canceled debts exceeding $600. If you abandon a property secured by a nonrecourse debt, the lender will also forgive the remaining mortgage balance but you are not required to report the canceled debt as income.
  
  

Mortgage Forgiveness Debt Relief Act

• The Mortgage Forgiveness Debt Relief Act of 2007 offers taxpayers special tax relief for mortgage debt forgiven from 2007 to 2012. The Act allows homeowners to exclude up to $2 million dollars of forgiven debt for a principal residence. The $2 million dollar limit applies to married couples who file taxes jointly. The limit for single filers and married persons filing separately is $1 million. This provision does not apply to second homes, rental homes or business property. You must complete IRS Form 982 to take advantage of the reduction in your tax liability when you file.
  
  

Considerations

• If you give up your home by agreeing to a deed-in-lieu of foreclosure, this is not considered abandonment by the IRS and is treated differently for taxation purposes. In addition to potential tax implications, abandoning your home can have serious consequences for your credit score. If you're planning to purchase another home in the near future, having a defaulted mortgage loan on your credit can make it difficult or even impossible to do so. Depending on the state in which your mortgage was issued, your lender may also be able to sue you for the remainder of the mortgage. In this situation, filing bankruptcy may be your only option for dealing with the unpaid loan.