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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10103
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I had a question about my house going into foreclosure? I

Customer Question

I had a question about my house going into foreclosure? I also filed for bankruptcy and that process is done now. My question, is will there be any money that i owe to the IRS after my forclosure goes through? I know they had the mortgage relief act that expired in 2014! I live in Massachuesstts.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I'm not sure I completely understand your question

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Are you asking about COD (Cancellation of debt) income?

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If the lender does not send a 1099-C then there has, s of yet, been no forgiveness and hece no income (or tax)

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OR, are you asking about whether taxes owed before the bankruptcy are still owed?

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Give me a little more detail if you would, and we'll go from there

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I'll be here

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LAne

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Customer: replied 1 year ago.
Hi, yes i have not gone through the whole forclosure process yet, but wanted to know what the tax liablity would be if they do send me a 1099-C? I owe $250,000 on the house but its probably worth about $125,000?
Expert:  Lane replied 1 year ago.

OK,

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The amount that's forgiven is the amount of income. Meaning debt still owed MINUS what they get out of the house at foreclosure sale ... so 250,000 - 125,000 = 125000

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However, if you can show insolvency (you do this by including form 982 with your tax return) on the date BEFORE the debt was forgiven (there will be a date on the 1099-C is you DO get one) then you can use the 982 to EXCLUDE this income.

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Insolvency means total value of assets minus value of debts (INCLUDING that 250,000)

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Expert:  Lane replied 1 year ago.

and finally.

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Massachusetts is a recourse state, meaning that lenders have the right to seek a deficiency judgment against a homeowner who defaults on a loan obligation.

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SO, the lender will decide to either pursue a deficiency judgment against you after the sale or they will agree to cancel the remaining debt.

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It's only if (and if so, when) they DO cancel the remaining debt that they'll send that 1099-C.

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Then, if you can show insolvency on the day before the foreclosure, you can use form 982 to exclude the debt.

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I hope this has helped.

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If this HAS helped, (and you don’t have additional questions on this), I'd really appreciate your positive rating … (by clicking or touching the stars or smileys on your screen) … … That’s the only way I'll be credited a portion of what you've paid JustAnswer.

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Thank you,

Lane

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