If the home was not forclosed on, there is nothing to worry about for taxes.
However, all the interest is deductable on schedule A as well as any late fees
since the legal fees were essentially for saving your home, they can be added to cost basis to reduce capital gains when you sell the home.
thanks for the additional information. wow...I find it hard to believe no intetest was paid in 2007. But I guess it can happen. I am not sure a vioaltion of the law did not exist. YOu should see an attorney about that.
in the mean time:
did you receive a 1099 A or 1099 C?
Was anypart of the debt forgiven?
they shoudl be giving you a document, a 1099 of some kind. something does not seem right here.
You can contact the IRS and ask for assistance in getting a 1099 from them.
the reason you want to do this is to resolve the issue of the loan foreclosure.
Technically by regulation you have to get a 1099-C or A, and you would have to determined any capital gains or any taxable income from forgiveness of any debt.
Now do not panic. Because of the two rules, you would not have any tax liabilty in actuallity. But you have to do the paperwork in order to take advantage. The IRS can come back 10 years for tax debt, but you can only go back three years for a refund.
If you get a1099 A, which is what you should get, you would have to figure any capital gains, but since you are also able to invoke a capital gains exclusion of 250,000 if finling seperate, and 500,000 if filing jointly, you can avoid any capital gains tax.
If there was no capital gains and there was a sale price short fall on the sell of the porperty versus the debt, then you would have to pay tax on the fogiven debt, but would complete a form 982 to avoid the tax under the new rules of the mortgage forgiveness act.