14 replies to this topic

[savemanatees]

Don't be stressed out and worried that you will owe income tax on the amount of your mortgage that you didn't pay. Let's use an example.

If your mortgage was $300,000 but you did a short sale for $200,000, then you have $100,000 in income that the IRS calls cancellation of indebtedness income.

If your tax rate is 30%, you would owe $30,000 on top of having this awful foreclosure or short sale on your credit report.

However, the way the law has read, there are two exceptions. One exception says that if you are insolvent at the time you get this cancellation of indebtedness income, then you owe no tax.

What does insolvent mean? It means if you add up all your assets such as cash and the value of your house (but excluding many retirement funds), and you subtract all your liabilities such as your mortgage and the amount you owe on your other loans, then you end up with a negative number. You owe more than you have. You are technically insolvent.

So you have no tax liability.

Also, if the mortgage is non-recourse, then you have no tax liability. So for many states such as California, loans used to purchase a primary residence are non-recourse and therefore, for these purchase money mortgages, there is no liability for cancellation of debt.

I posted a thread topic pointing out all the exceptions in CA. See my thread on the CA foreclosure rules.

And there is now a law that Congress passed and President George W. Bush signed, H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. That Act says two things. First, that the insolvency test is no longer the only test that says whether or not you have cancellation of debt income tax liability.

Now, you do not have cancellation of debt income tax liability if do a short sale or a foreclosure, so long as the house is your principal residence and the amount of cancellation of debt does not exceed $2 million.

For investors, the insolvency loophole will continue to be critical because they may have houses and properties that they lose in foreclosure and because they are insolvent, they can avoid federal tax liability for cancellation of indebtedness.

This law was welcome but will not have much affect because most people already could escape federal tax liability based upon the insolvency test. And it does not affect investment property. However, every little bit helps.

HTH,

savemanatees

[flacorps]

The act is only effective for three years. But the creditors may go three years without issuing the 1099-C form. Debtors can't make creditors issue them at any particular moment--although it may be a matter for negotiation between debtor and creditor.

The key thing to understand is that debtors who disengage from creditors abdicate any influence over when or whether a 1099-C issues and therefore are at risk of having it hit them well down the road when their degree of financial recovery means the insolvency test isn't satisfied and tax will therefore have to be paid.

There is no easy answer to the question of whether to try to settle a huge deficiency or just let it ride, although the BK process can remove a lot of the uncertainty.

[flacorps]

There is some confusion over what creditors can and must do in order to satisfy the IRS with respect to the repossession of a home.

The creditor must file a form 1099-A unless a form 1099-C is filed.

If the creditor files a form 1099-C, the form 1099-A is obviated.

If the creditor files a form 1099-A with respect to the foreclosure, the creditor may at some point in
the future file a form 1099-C if circumstances require it (if the debt is forgiven or deemed forgiven by the IRS).

http://www.irs.gov/p...pdf/i1099ac.pdf

The form 1099-A's tax consequences are typically not the ones you're worried about. It's the 1099-C that is the killer.

[Jeffmo32]

For investors, the insolvency loophole will continue to be critical because they may have houses and properties that they lose in foreclosure and because they are insolvent, they can avoid federal tax liability for cancellation of indebtedness.

Unlike the single homeowner, a properly set-up investor in real estate should be writing off the loss.

Therefore, if they were to incur a 1099-C it would be offset with a corresponding loss on the sale of the property, which, I would imagine, will usually be greater than the 1099-C itself, pending basis v. sale calculation..

[Jeffmo32]

Also, if the mortgage is non-recourse, then you have no tax liability. So for many states such as California, loans used to purchase a primary residence are non-recourse and therefore, for these purchase money mortgages, there is no liability for cancellation of debt.

California considers a mortgage on a primary residence non-recourse debt ? That doesn't sound right.

I'm off to look at your CA specific thread.

[saywhat]

There is some confusion over what creditors can and must do in order to satisfy the IRS with respect to the repossession of a home.


If the creditor files a form 1099-A with respect to the foreclosure, the creditor may at some point in
the future file a form 1099-C if circumstances require it (if the debt is forgiven or deemed forgiven by the IRS).

So, what is the likelyhood, given today's economy... that we will see a 1099C after a 1099A? That would be a good thing right? I posted the 1099A and deficiency judgement thread and this seems applicable. But given that the bank showed the FMV to be higher than the amount owed, there couldn't be a 1099C? Or could there? I can give more info if necessary.

At this point I just want to move on with my life.
Thanks

[luckie clutse]

I am confused...

Here is my situation,

I had a home in Detroit that was foreclosed. They sent me a 1099-A and said the principal was 125K and the fair market value was 97K...I then recieved a letter from the city in the mail that said my market value of the home was 70K....I tried to file my taxes today and they said I needed a 1099-C...I spoke with Homecomings Financial (GMAC) and they refused to give me one because I still had a lien on the property even thought I left 18 months ago. What does this all mean and what am I to do? file bankruptcy?

I'm lost...please speak in plain English lol

[HalfFull]

California considers a mortgage on a primary residence non-recourse debt ? That doesn't sound right.

I'm off to look at your CA specific thread.

The purchase loan is very often non-recourse. I believe that most refi's are recourse.

[luckie clutse]

I am confused...

Here is my situation,

I had a home in Detroit that was foreclosed by GMAC. They sent me a 1099-A and said the principal was 125K and the fair market value was 97K...I then recieved a letter from the city in the mail that said my market value of the home was 70K....I tried to file my taxes today and they said I needed a 1099-C...I spoke with Homecomings Financial (GMAC) and they refused to give me one because I still had a lien on the property even thought I left 18 months ago. What does this all mean and what am I to do? file bankruptcy?

I'm lost...please speak in plain English lol

any answers?

[number1979]

This is one thing that is confusing the hell out of me as well. Our house is being foreclosed (just got served the summons) and we we're going to file BK7 and give the house up. I am wondering if it is better to wait until the house has been foreclosed to file or if it will make a difference as far as tax liability. Does the insolvency thing mean at the time the house was given up or when they hit you with the 1099? If they foreclosed and filed a judgment and then we filed would that wipe out the judgment and then they wouldn't be able to send a 1099?

[flacorps]

The BK is going to forestall any imputed income from the cancellation of indebtedness. That's one of the benefits of going BK. If you do not go BK, then you will need to be able to show on a form 982 that you could have gone BK in order to avoid paying tax on C.O.D. imputed income.

[by2]

So the creditor files a form 1099-A with respect to the foreclosure, the creditor then filed a form 1099-C which was forgiven by the IRS for my foreclosed home in 2008. Should this mortgage company also still be reporting on my credit reports for this debt???

[salem]

So if you do the bankruptcy 1st (not keeping the house) and then they foreclose do you only get the 1099A or also a 1099C? What about the tax liability and deficiency judgement, does the bankrupcy absolve you of those?

[jmw1212]

I'd like to know the answer to this as well. We filed bk7 in May and then were foreclosed on several pieces of property in Nov. I recevied a 1099-c for each property.

I did mention this to my CPA and he told me that he will use the basis I had in each property to calculate it and it should be a wash. So is this what he meant:.. say you have $200,000 invested into a piece of property, the bank forecloses and there is a charge off of $100,000, because your basis was $200,000, you don't owe anything in taxes. I think I may not understand this correctly, Can someone explain how this works.

So if you do the bankruptcy 1st (not keeping the house) and then they foreclose do you only get the 1099A or also a 1099C? What about the tax liability and deficiency judgement, does the bankrupcy absolve you of those?

[jmw1212]

See my post in the bankruptcy forum about this for more info and some great answers:)

I'd like to know the answer to this as well. We filed bk7 in May and then were foreclosed on several pieces of property in Nov. I recevied a 1099-c for each property.

I did mention this to my CPA and he told me that he will use the basis I had in each property to calculate it and it should be a wash. So is this what he meant:.. say you have $200,000 invested into a piece of property, the bank forecloses and there is a charge off of $100,000, because your basis was $200,000, you don't owe anything in taxes. I think I may not understand this correctly, Can someone explain how this works.

So if you do the bankruptcy 1st (not keeping the house) and then they foreclose do you only get the 1099A or also a 1099C? What about the tax liability and deficiency judgement, does the bankrupcy absolve you of those?