Thanks. BotXXXXX XXXXXne is you are not going to owe tax on the amount of the deficiency. You have two possibilities to avoid tax liability. One would be if this were your principal residence. Normally, debt forgiveness results in taxable income
. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Under the Act, PRINCIPAL RESIDENCE- For purposes of this subsection, the term `principal residence' has the same meaning as when used in section 121.'. Section 121 of the IRS code deals with capital gains tax exclusion on principal residence if a person lives in the home for the past 2 (aggregated) of 5 years. So, if you meet the definition of "principal residence" then you could exclude any forgiveness under this Act. And, this is a FEDERAL law, and it is specifically applicable to your FEDERAL tax
If you don't meet the definition of principal residence, then you are not going to have to include any deficiency because of the Arizona non-deficiency statute. If you meet the requirements of the Arizona statute, then it's a non-recourse loan for which you never had any liability for any deficiency. If you have no liability, there can by definition be no forgiveness because you can't be forgiven for something you never owed in the first place. Thus, no recourse for the deficiency means no forgiveness of debt which in turn means no inclusion of forgiveness for your taxes. This is not limited to your state return. If the loan is a non-recourse loan, there is no liability, so there is no forgiveness on either the state or federal level.
Thank you so much for allowing me to help you with your questions. I have done my best to provide information which will be helpful to you. If I have not fully addressed your questions or if you have any follow up questions, or if I have misinterpreted your questions in any way, please do not rate me yet, but simply ask a follow up question without rating so I can provide you with a fully satisfactory answer. If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service with 3, 4, or 5 faces/stars so I can receive credit for helping you today. I thank you in advance for taking the time to provide me a positive rating!