You should qualify. Under the Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012), you might not need to pay any income tax on canceled debt (which is the unpaid loan balance that is forgiven by lender) resulting from a foreclosure, short sale or deed in lieu of foreclosure if you as the borrower satisfy certain conditions for mortgage tax relief (e.g., principal residence, owned for at least 2 years, debt amount of $2 million or less).
IRS Code section 121 defines "principal residence" as: ". . . during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more. "
For more information on debt foregiveness, 1099-A and 1099-C, see:
You should not have to pay ant taxes regarding the foreclosed property. The property taxes are a lien against the property, not against you personally. Foreclosing bank or new owner wiil be responsible for payment.
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