If you go through a short-sale, deed in lieu of foreclosure, foreclosure or obtain a loan modification, your lender may send a 1099-C.  However; just because you received a 1099-C, this does not mean you owe taxes on the debt relief.

If you meet one of these tests you most likely do not owe taxes on the cancellation of the debt (as income).

1 - If you are technically insolvent, you should not owe income tax on cancellation of debt income. See form 982.

2 - If your mortgage is non-recourse you do not owe on cancellation of debt income. In California, most purchase money first mortgages are non recourse. A second mortgage, however, in most cases is a recourse loan and you may owe taxes on the debt forgiveness or cancellation on second mortgages.

3 -In December 2007, President Bush signed into law H.R. 3648 – Public Law 110-142, which says you do not pay tax on cancellation of debt income up to $1 million, or $2 million for married couples filing jointly.  See the Mortgage Debt Forgiveness Act information.  Exceptions are any cash-out you received unless used for home repairs or improvement.  Also see: Mortgage Cancellation Summary.