Posted on: 08th Feb, 2008 01:35pm
If your house goes into foreclosure and it sells for less than what you owe on the property, there will be a deficiency. As a borrower, you're liable to pay it off. In case, your lender forgives this deficiency, it'll be considered as your taxable income. You'll be sent a 1099-A Form by the lender and you'll have to report the income to the IRS. Similarly, if your lender modifies the terms of the loan and it results in cancellation of a certain portion of the debt, the cancelled debt amount will be taxed by the IRS.
What is 1099A Form and why is it sent to you?
Your lender is required to report the deficiency from the foreclosure or the short sale to the IRS for tax purposes. This is why they send you 1099-A Form, which is mainly for informational purpose. However, if you receive a 1099A Form, it doesn't mean the deficiency has been forgiven. The lender can come after you in future to collect the debt.
If the lender forgives the debt, you'll receive a Form 1099-C. It suggests that the remainder of the debt has been cancelled and the lender will not come after you to collect the debt. You'll be required to report this as your income on the tax return.
If the lender forgives the debt, you'll receive a Form 1099-C. It suggests that the remainder of the debt has been cancelled and the lender will not come after you to collect the debt. You'll be required to report this as your income on the tax return.
Is there an exemption from paying taxes on this income?
If the mortgage is a recourse loan, you will owe taxes to the IRS on the cancelled debt amount. But the Mortgage Forgiveness Debt Relief Act, 2007 does allow you to exclude the cancelled debt amount from your gross income under certain conditions.
However, in case the mortgage is a non-recourse loan, the lender cannot come after you to collect the deficiency. They have to be satisfied with whatever they get from the sale of the collateral. So, even if there's a deficiency, it will not be considered as your cancellation of debt income. Thus, you will owe no taxes to the IRS due to the deficiency on the non-recourse loan.
However, in case the mortgage is a non-recourse loan, the lender cannot come after you to collect the deficiency. They have to be satisfied with whatever they get from the sale of the collateral. So, even if there's a deficiency, it will not be considered as your cancellation of debt income. Thus, you will owe no taxes to the IRS due to the deficiency on the non-recourse loan.
iT SHOWS WHAT WE OWED AND WHAT THEY SAY WAS FAIR MARKET OR REALY WHAT IT SOLD FOR AT THE AUCTION. SO THE DIFFERENCE WOULD BE INCOME RIGHT? CAN I USE THAT AS A LOST ON MY INCOME TAX FOR MY HOME? NEED HELP
In case of short sale, the mortgage lender will want you to pay the deficient balance resulting from the sale of the property. In such a situation, the question of Mortgage Debt Relief Act won't arise. In case, the lender forgives the deficient balance resulting from the sale of the property, then you will be able to take advantage of the Mortgage Debt Relief Act.
Hello,
Our home foreclosed this month, and we were informed by our lendor that they cannot come after us (maybe bc we were first time buyers), but they also said they are sending us a 1099A form. What does this mean? Are we protected by the debt forgiveness act so we don't have to pay taxes? I think we have a non-recourse loan... so wouldn't that make us exempt from paying taxes also? So confused and trying to figure this out before the new year.
Thanks!
Our home foreclosed this month, and we were informed by our lendor that they cannot come after us (maybe bc we were first time buyers), but they also said they are sending us a 1099A form. What does this mean? Are we protected by the debt forgiveness act so we don't have to pay taxes? I think we have a non-recourse loan... so wouldn't that make us exempt from paying taxes also? So confused and trying to figure this out before the new year.
Thanks!
Hi Guest,
The deficient balance is forgiven by the lender and thus he will be sending you the 1099a form. You need to submit it when you file taxes. You will be liable for paying taxes for the forgiven debt. But depending upon the Mortgage Debt Relief Act, you won't be liable for paying the taxes.
The deficient balance is forgiven by the lender and thus he will be sending you the 1099a form. You need to submit it when you file taxes. You will be liable for paying taxes for the forgiven debt. But depending upon the Mortgage Debt Relief Act, you won't be liable for paying the taxes.
Thanks,
But since we have a California Non-Recourse loan, aren't we exempt from paying taxes? I don't think the MDRA applies to Non-Recourse... I think it only applies to Recourse loans.
Can you explain?
Thanks!
But since we have a California Non-Recourse loan, aren't we exempt from paying taxes? I don't think the MDRA applies to Non-Recourse... I think it only applies to Recourse loans.
Can you explain?
Thanks!
Hi Guest,
As your debts will be forgiven as per the state laws of California, you won't be liable for paying the deficient balance. So, the question of MDRA does not arise.
Thanks
As your debts will be forgiven as per the state laws of California, you won't be liable for paying the deficient balance. So, the question of MDRA does not arise.
Thanks
i filed for chapter 7 bankruptcy, which included my primary residence. i had a first and a second loan on it. when i refinanced, the proceeds were used to payoff debt. my bankruptcy was discharged in 2006 and now the irs says that i owe taxes on 95,000 dollars. do i have to pay taxes on this money, even if i never touched a penny, nor did i go on vacations? all funds were sent directly from the escrow office.
Hi rosie!
Welcome to forums!
I think you will have to pay the taxes to the IRS as some of the debts were forgiven in the bankruptcy filing. The forgiven debts will be considered as your income. You should immediately contact a tax adviser and take his opinion in this matter.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
I think you will have to pay the taxes to the IRS as some of the debts were forgiven in the bankruptcy filing. The forgiven debts will be considered as your income. You should immediately contact a tax adviser and take his opinion in this matter.
Feel free to ask if you've further queries.
Sussane
Hi there,
Thanks for the helpful article.
I have a situation:
1. I have a primary residence in california. and I am current on it.
2. I also have a lot (vacant land) in Nevada. There is only first loan on it. No second loan or heloc on that. I am default on this for last 2 years. Now this property was reported to me going to foreclosue.
My question Is:
My credit score is already bad now. Can the bank come chasing me for the deficiency, harass me for that or not? Also, is it allowed to report a 1099 on me or not in this case.
LMK if there are questions.
Thanks in advance
Guss
Thanks for the helpful article.
I have a situation:
1. I have a primary residence in california. and I am current on it.
2. I also have a lot (vacant land) in Nevada. There is only first loan on it. No second loan or heloc on that. I am default on this for last 2 years. Now this property was reported to me going to foreclosue.
My question Is:
My credit score is already bad now. Can the bank come chasing me for the deficiency, harass me for that or not? Also, is it allowed to report a 1099 on me or not in this case.
LMK if there are questions.
Thanks in advance
Guss
Hi Guest!
Welcome to forums!
After foreclosure, the lender has the rights to come after you for the deficient balance resulting from the sale of the property. However, as you're staying in Nevada, the lender will have to file a lawsuit and get a judgment against you in order to come after you in California.
Feel free to ask if you've further queries.
Sussane
Welcome to forums!
After foreclosure, the lender has the rights to come after you for the deficient balance resulting from the sale of the property. However, as you're staying in Nevada, the lender will have to file a lawsuit and get a judgment against you in order to come after you in California.
Feel free to ask if you've further queries.
Sussane
is a deficiency forgiveness of debt any different in a short sale than a deed in lieu of foreclosure? does the irs see it any differently?
Hi june robbins,
The IRS won't see the forgiving of deficiency balance in short sale or a deed in lieu of foreclosure as anything else. If the lender forgives the deficient balance, then you will be liable for paying off the taxes for that forgiven amount. However, depending upon the Mortgage Debt Relief Act, you won't be liable for paying any taxes on it.
Thanks
The IRS won't see the forgiving of deficiency balance in short sale or a deed in lieu of foreclosure as anything else. If the lender forgives the deficient balance, then you will be liable for paying off the taxes for that forgiven amount. However, depending upon the Mortgage Debt Relief Act, you won't be liable for paying any taxes on it.
Thanks
second mortgage lender agreed to participate in short sale with payoff of $25k of $230k owed, which then became a non-recourse debt, sent me a 1099a showing $205k, i reported on my income tax return as cancelled debt income, am i still liable for repayment of $205k?
Hi Guest,
If the lender has forgiven the deficient balance, then you won't be liable for paying the amount. However, you will be liable for paying taxes for the forgiven debt as it may be considered as your income.
If the lender has forgiven the deficient balance, then you won't be liable for paying the amount. However, you will be liable for paying taxes for the forgiven debt as it may be considered as your income.
i file bankruptcy 2 yrs ago the mortgage was part of it there was no reaffirment pay the mortgage volintary now im behind on mortgage im doing a deed in lieu with them will i have have read that the amou nt forgive is taxable is this true
Welcome downeysr,
You are not liable for paying any deficient balance to the lender. But as far as I know, you may have to pay taxes for the deficient balance that is forgiven as it will be considered as your income.
You are not liable for paying any deficient balance to the lender. But as far as I know, you may have to pay taxes for the deficient balance that is forgiven as it will be considered as your income.