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The market value has no tax consequence so I would not be concerned about the number they entered there. The foreclosure sale does have a tax consequence if the sale of the home did not produce a sufficient amount to pay off the mortgage in full. If that was the case you will, later perhaps in 2012 for 2011, receive a 1099-C (Income from debt cancellation). This amount will be taxable unless you are able to claim one of the exclusions provided for in the law. Secondly, unless the property was a rental property you are not able to claim a loss on a personal residence (first or otherwise).
I will get the exclusion rules for you and return. You mat want to calculate this while it is fresh in your mind and details get blurred. Then save it for next years return preparation.
Here is some introductory information. I will also get the insolvency worksheet and provide that momentarily.
IR-2007-159, Sept. 17, 2007
The new section of IRS.gov includes a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS. . In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.
The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.
Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.
The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property's fair market value, it may not necessarily reflect its true value in some cases.
The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender immediately if any of the information shown on their form is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).
The IRS also reminds lenders of their obligation to provide accurate information on the Form 1099-C. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.
The IRS normally initiates these follow-up contacts by sending the borrower a notice. The tax agency urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.
Related Item:Questions and Answers on Home Foreclosure and Debt Cancellation
Here is a link concerning insolvency. The explanation begins on page 4 of this IRS document and is followed by the insolvency worksheet.
Thanks for the information. Please let me go by actual numbers. I owed 4700.00 on the house and it was sold for 235,00.00 since the deficit is 235,00.00 and it is equal to the value of the house then can I say that the tax liability is zero because the forgiven debt is not above the value of the house. If the forgiven debt was 245,000.00 then can I say I owe about $10,000.00 in tax liability.