(PRWEB) April 26, 2012

Anytime a lender writes off, or forgives, debt, it can be considered taxable income to the borrower. The larger the write off of the loan by the lender, the larger the potential tax bill may be issued to the taxpayer/homeowner. Consider that every $ 10,000 in forgiven debt could incur as much as $ 1,500 to $ 3,500 in federal taxes, depending on a familys tax bracket. If a home is $ 100,000 underwater, that could mean a federal tax bill of up to $ 35,000. In addition, state and local income taxes could increase the pain.

In recent years, most underwater homeowners who lost property to foreclosure or short sales were excused from having to pay taxes on this income, thanks to the Mortgage Debt Relief Act of 2007. The current law states that homeowners dont have to include forgiven debt as income provided:

1.