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Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.
If any part is forgiven under either of your options posted you would have taxable income to deal with.
Different expert here - Welcome. My name is XXXXX XXXXX it will be my pleasure to assist you with your tax question today.
You mentioned that the property is your principal residence, so the following will apply:
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring (such as a modification), as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
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I understand that if Foreclosure, Short sale or Loan Modification happens to me before 2013, any deficiency amount will be forgiven. In my case, I will run into 2014 and conclude any of the above in 2014, How will my tax consequences or the debt forgiveness change?
Thank you for your follow-up question.
Please note that a few months ago, the Making Home Affordable (MHA) programs were extended by the federal government through December 31, 2015. Even though the Mortgage Forgiveness Debt Relief Act is not part of the MHA programs, extending it is being made a top legislative priority so that it coincides with the MHA program deadlines.
If it is not extended, then the cancellation of debt will be taxable income, but you may be able to utilize Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income. Any remaining canceled debt, if any, would be included as income on your tax return.
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Ok...So for clarification... I am not liable in California which I know is a non-recourse state, for any deficiency amount right?
Does this apply to my primary residence only or same for other investment properties?