The simple answer is “maybe”.

There are two possible consequences you must consider: 

Taxable cancellation of debt income. (Note: The cancellation of debt income is not taxable in the case of non-recourse loans.  Idaho is a recourse state.)

• Non-recourse means that the only recourse a lender has in foreclosing is the property (California is a non-recourse state).
  
• Recourse means that the lender has both the property and any other asset you may have available as a means of collecting a debt.  See previous post about deficiency judgment for more details.
  

A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes). (Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

• The key point her is that foreclosures are treated like sales for tax purposes.  This often overlooked by people facing this situation and thus they forget to anticipate this potential liability.
  

To see if you have any taxable gain follow this link to the IRS.gov web site for the calculation. 

I just posted all the information needed to get your tax credit for Qualified First Time Buyers and what to do if you purchased in 2008. Visit my First Time Buyer page and see what this is all about.

Personally speaking I am conflicted on this issue.  Being a Realtor for 25 years I am obviously concerned about the housing market.  I know many people who continue to make their payments and were conservative on their home purchases. On the other hand I know many people who are facing some financial difficulties. These are regular folks whose livelihood directly or indirectly is dependent upon the housing market. This would include people who manufacture and sell household products, dentists & insurance agents whose clients can no longer pay because they are tied to the housing industry and aviation companies whose business is down dramatically as result of these issues. 

This embedded video is good explanation of why some sort of relief is a good thing for the economy in general. What do you think?

Here is the other side of the debate.

I hear this all the time “I want to buy a foreclosure”.  What I have found after further questioning is that what people are really saying is that they want a good deal and the home that fit their needs.  The latter part of that “home that fits their needs” is really the most important when it comes down to it.  What clients come to realize really fast is that the foreclosure properties are in generally very poor condition (missing appliances, broken windows and landscaping that hasn’t been maintained for months).  The better overall values are those homes that have been well maintained and the seller is genuinely motivated to sell.  Maybe they have purchased another home in the area or they are waiting to join the rest of the family who has relocated to another state.  In any event they are motivated to sell, the home is in a great location and it is well maintained.   View the tour for the .41 acre home or the tour for the reduced $35,000.