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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3747
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Lost home to foreclosure in January 2013. I had refinanced

Resolved Question:

Lost home to foreclosure in January 2013. I had refinanced thee or four times. I owed $193,000 when I stopped making payments. The notice of foreclosure says I owed $239,000. Will I be taxed on $193,000? The home sold at auction for $155,000. Thank you.
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

NPVAdvisor :

Hi,

NPVAdvisor :

NO you will not, as one article put it:

NPVAdvisor :

The Mortgage Forgiveness Debt Relief Act survived the fiscal cliff when it was given a one year extension through 2013. Homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have the added insult to injury of losing their home and then having to pay taxes on the loss up to $2 million ($1 million if married filing separately).

NPVAdvisor :

And here's the IRS guidance, (although remember this is what was extended through 2013) : http://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

NPVAdvisor :

Foreclosue, Deeds in Lieu and Short Sales all apply

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question

Customer:

So, you are telling me that I will have to pay taxes on the difference between the $193,000 I owed at start of foreclosure and the amount it sold for at auction ($155,000). I purchased the home in 1987 and refinanced 3 or 4 times. That is why I was underwater. Thank you.

NPVAdvisor :

No, as long as the 1099 is for 2013 of previous you will owe nothing period... my point was that all forgiven debt (whether it takes the form of any or all of the three) is forgiven

NPVAdvisor :

OR previous (2007 and forward)

NPVAdvisor :

What it turns on is simply (1) forgiven debt and (2) it was your primary residence

NPVAdvisor :

That's it

NPVAdvisor :

File form 982 with your tax return to show that the 1099 was for forgiven debt on your primary residence... that's it

Customer:

Interesting. My tax lady said I would owe taxes on the difference as I laid out above. My understanding was it depended if the mortgage bank sent you a 1099. So, for sure, I will owe nothing in taxes for 2013?

NPVAdvisor :

let me back up and kind of put it in perspective...

NPVAdvisor :

(1) Whan a bank sends you a 1099 (and a copy of the 1099 to IRS), it means that they have forgiven the debt (part of their motivation is to be able to document that they HAVE written it of and can take their own deduction) ...

NPVAdvisor :

(2) Normally IRS considers forgiven debt a net increase in wealth (you had the use of the money and did not pay it back), so it's essentially income

NPVAdvisor :

(3) the mortgage forgiveness act was done to say to taxpayers... we're not going to tax you on that forgiven debt because of the mortgage crises and the inflated housing market... in other words... the way it happened

NPVAdvisor :

(most other forms of forgive debt are still considerd income (used to be called phantom income)

Customer:

What amount would be considered income? The difference between the $193,000 I owed when I stopped making payments and the final $239,000 (which included late payments) is what is added to my income?

NPVAdvisor :

SO, of you have forgiven debt, and that debt was because of (1) a short sale (2) a foreclosue OR (3) a deed in lieu of foreclosure, it will not be taxable ... IUF ... it was secured by your primary residence

NPVAdvisor :

Any and all forgiven debt

NPVAdvisor :

whatever the bank writes off and doesn't come after youffor

Customer:

So, I will not be taxed on the money as additional income? Not clear on that.

NPVAdvisor :

The botXXXXX XXXXXne is the 1099

NPVAdvisor :

That is correct

NPVAdvisor :

Tight now we don't know what might happen on a 1099 that comes floatin for the 2014 tax year (where the bank did not actually forgive/write off for themselves the debt during the time for which the extension covers

Customer:

So, I will not know until I receive the 1099 from the mortgage company in 2014?

NPVAdvisor :

That's exactly right .... You can call them and they should be able to tell you ... but from a pure tax reporting and complaince perspective, it's that 1099 that the IRS will receive that is what needs to be documented as primary residence debt that was forgiven

NPVAdvisor :

When the bank writes it off (and they get their OWN deduction) is the year for which they will SHOULD give the 1099 .. that's the tax year that the tax was forgiven

Customer:

Does that mean the 1099 will state that I owed $239,000 (which includes the payments and penalties) and then the form states that the mortgage company wrote off the loss? I initially owed $193,000.

NPVAdvisor :

The amount forgiven will reflect the difference between what you legally owed them and what they can sell the house for to offset that debt (what you INITIALLY owed may not be the end of it ... But the value of the house will reduce what is forgiven

NPVAdvisor :

And agan, what the 1099 say is, in a way, irrelevant ... if it was forgiven debt (and it would be if a 1099 is issued), and if it was secured by your primary residence (WHATEVER THAT AMOUNT IS) it will not be taxable in 2013

Customer:

Will I face any repercussions if I contact the mortgage company?

NPVAdvisor :

NO if the notice of foreclosure has already been sent it's really in the lawyers' hands now. Every bank is different and has it's own personality, but if they've already started foreclosure, there's really nothing worse they can do... They MUST, by law, issue the 1099, and they've already done to you as much as they can (take your home)

NPVAdvisor :

Now, it IS possible that they don't yet know what the actual amount will be, but again that's not really the point ... whatever it is will not be taxable because of the mortgage forgiveness relief act

Customer:

So, no taxes for 2013 related to the foreclosure. The foreclosure took place at the end of January 2013.

NPVAdvisor :

That's right .. No taxes for any primary residence debt forgiven in 2013, and if the foreclosure is done the debt was forgiven.\

Customer:

That's what I wanted to hear! Thank you for your patience in answering all of my questions. I will fill out the survey so you will be paid.

NPVAdvisor :

Would not be surprised AT ALL to find (if we could ever see inside those banks) that the foreclosure was scheduled in Jan 2013 because they thought the act would expire

NPVAdvisor :

Thank you so much... You are fine (Also the links will stay active for future reference... feel free to bookmark for future reference)

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3747
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 10 months ago.


Hi Carol,

Just checking back in her to let you know that if you have further questions, feel free to ask.

I'll be here

Lane
Expert:  Lane replied 10 months ago.

Thanks for the rating Carol.

If you’d like to work with me again, just say “For Lane only …” at the beginning of your question, and I’ll get the alert.

Thanks again,

Lane
Customer: replied 10 months ago.

Thank you again for all of your help.

Expert:  Lane replied 10 months ago.

You're very welcome.

I know it's hard to believe that there's some good news, but in this case it exists. :)

Have a good evening

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