There are tax consequences if you simply walk away from a delinquent loan.

For example, you buy a house and use the house as your personal residence.

You pay $600,000 for the house.

Down payment = $30,000

Mortgage loan = $570,000

You are personally liable for the mortgage.

You default.

Your lender accepts your voluntary sale of the house.

Your lender cancels the loan.

Similar houses are currently selling at $460,000.

You suffer a loss of $140,000.

You may not deduct this loss because the house was your personal residence.

You also now have reportable income of $100,000 because when the lender cancels the loan, the amount of your debt exceeds the market value of the home.

Therefore, the IRS will send you a Form 1099 and you will be taxed for the amount of debt that has been canceled.

In this case, $100,000 was canceled and you will be taxed for this amount as if it was ordinary income.

The $100,000 figure comes from the amount of the canceled debt. It will be taxed like your salary.

Please see IRS Publication 908 and IRS tax form 982 at irs.gov.