However, there are some exceptions. Last year, Congress passed relief for foreclosed owners -- but only those who lost their principal residence and didn't have a mortgage that they had previously taken as a cash-out refinance, using the proceeds for expenses other than improving their home, says Julian Block, a tax attorney and syndicated tax columnist in New York City.
But foreclosure victims may still not have to pay a tax tab, even if they had a cash-out refinance. That's because the IRS has long allowed taxpayers to escape a bill on forgiven debt if they are insolvent. If, for instance, you receive a Form 1099c from a lender saying it couldn't recover $5,000 of what it was owed, but your debts exceed your assets to the tune of $15,000, you must file Form 982 with your tax return to clear your tax obligation.
Living through loss
The emotional toll of leaving a home and neighborhood are impossible to quantify. One recent report released by First Focus, a Washington, D.C., advocacy group, finds that some two million children are likely to be impacted by foreclosure in some way, including the disruption of being placed in a new school after a move.
One glimmer of hope is that the large numbers of foreclosures today may lessen the stigma of the event, says consultant Throckmorton. She remembers when job applicants had to explain frequent changes in employment, because jumping from job to job was frowned upon. "Now that's considered normal -- with foreclosures so much in the news, it may prompt people not to make judgments."
Marilyn Kennedy Melia is a freelance writer in Northbrook, Ill.