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If the bank forecloses on your home, or if you are one of the lucky homeowners who have been granted a loan modification the next hurdle will be the IRS.
Any loan money that you don't pay back, either because of a default or a modification is considered income by the IRS.
That means you have to pay tax on it. but congress has carved out an exception for homeowners.
During an IRS sponsored satellite interview the national taxpayer advocate told 7 On Your Side many in the Bay Area will qualify.
"Congress passed in 2007 that if you used your mortgage to buy or improve your home than the amount of that mortgage will not be taxable income what you have to do is tell the IRS you are claiming that exception, and you do that with form 982," said National Taxpayer Advocate Nina Olson.
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