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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4093
Experience:  35 years tax experience, including four years at a Big 4 firm.
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We are in MO. We are having to file Chapter 13 Bankruptcy.

Customer Question

We are in MO. We are having to file Chapter 13 Bankruptcy.
With our house, we are a little underwater. We have determined to not keep the house. We are currently behind on our payments, and do not plan to make any more.* Original 2007 loan $123K
* Current balance around $99K
* Current Market Value around $90KWe have been offered:
1) Deed in lieu - 45 days to be out. $6200 given to us by mortgagee at the end of the Deed in lieu.
2) Short Sale - We have to have it listed with a realtor within 15 days, and have it listed until it sales, with the mortgagee dictating the price. We can stay in the house until it sales. Upon completion of the Short Sale, the mortgagee will given us $7100.
3) We could also just keep it until they foreclose on it.Our bankruptcy attorney told us that there might be tax implications with the deed in lieu and/or short sale. He recommend that we speak with a tax professional to determine the best route.In online searching, we noted the Mortgage Forgiveness Debt Relief Act. It appears that short sales (at least through the end of 2016) are available for this act.Therefore, with tax implications for any loan forgiveness amount (i.e. receiving a 1099-c or similar) what is the best option for us as we go through the Chapter 13 process (i.e. deed in lieu, short sale, or allow them to foreclose?)
Submitted: 5 months ago.
Category: Tax
Expert:  PDtax replied 5 months ago.

Hi from Just Answer. I'mCustomer I'll assist.

Customer: replied 5 months ago.
Great. This is my first time using this service. Do you need any additional information than I have already provided?
Expert:  PDtax replied 5 months ago.

I can work with what you have.

The good thing about bankruptcy and foreclosure is you likely can avoid any tax on the sale of your home.

With option 1, I assume your purchase price was $123,000. you would be selling at a tax loss, which is not deductible.

Customer: replied 5 months ago.
Our main concern is any tax forms that the mortgagee might submit to us for the difference of what is owed (around $99K) and for what is sales for in either a short sale or deed in lieu. With comps in the area, current condition/upgrades of our house, etc, I could see it going in a short sale for $60k-$70K and a deed in lieu for maybe $50K-$70K. Therefore, we could get a 1099 for $29K to $50K or more.Does the Mortgage Forgiveness Debt Relief Act help us in any way if we do a short sale or deed in lieu?
Expert:  PDtax replied 5 months ago.

Option 2 similarly sells the property at less than purchase, and as such is a tax loss (no 1099-C issues).

Option 3 is different, in that the bank will assign a value for the 1099-C, and this transaction could create debt forgiveness income for 1099-C reporting.

Your attorney was correct to refer you for tax advice, since many folks get debt relief that creates a taxable gain. As you are in bankruptcy, any such gain would likely qualify for nontaxable treatment as well (insolvency - Form 982).

The sale of your home under options 1 or 2 do not create debt forgiveness income. You are selling for the amount of the debt plus cash at closing. This is just like selling to a third party for all cash that pays off the loan and you see a check at closing.

Expert:  PDtax replied 5 months ago.

The deed in lieu might not create taxable debt forgiveness income. I don't have enough other information to say definitely. But options 1 and 2 allow you to escape the issue entirely.

I hope this answer meets your needs. Thanks for asking at Just Answer. Positive feedback is appreciated using our five star rating scale. I'mCustomer

Customer: replied 5 months ago.
Option 1 is deed in lieu
Option 2 is short sale
Option 3 is foreclosureFor options 1 & 2, the amount of the sale would be less than the amount that we currently owe. Therefore, we would not receive a check for the difference.The mortgagee is offering to forgive the difference in debt between what is owed on the house, and what it can be sold for in both options 1 & 2. Therefore, we were informed that the mortgagee might present a 1099-C to us, and it might be a taxable event.
Customer: replied 5 months ago.
We are not concerned with a taxable event if by selling the house for more than we purchased it. We are concerned with a taxable event if the mortgagee sales for much less than what we owe, and then the mortgagee present us a 1099 for the forgiven debt.
Customer: replied 5 months ago.
You stated "The deed in lieu might not create taxable debt forgiveness income. I don't have enough other information to say definitely. But options 1 and 2 allow you to escape the issue entirely."However, Option 1 is deed in lieu (as per my first post.) Please clarify you comments. It you want to use abbreviations, please use DIL, SS, and FC where we can be clear which you are speaking to.
Option 1 is deed in lieu (DIL)
Option 2 is short sale (SS)
Option 3 is foreclosure (FC)
Expert:  PDtax replied 5 months ago.

I misunderstood the scenarios. Got it now.

Option 1: DIL total proceeds less than loan, 1099C possible. Small difference of some $3,000 1099C, which is likely not taxable. Short window to move.

Option 2: SS, also total proceeds less than loan, 1099C possible. Small difference of some $2,000 1099C, which is likely not taxable. Longer window to move. Seems better.

Option 3: FC while under bankruptcy protection could take months to be forced out, or years. 1099C will be issued, and you will have little control over this reporting, and likely little recourse years later when you do get the form, to dispute things like the fair value the bank will report. Could be best if you get to live there for some time for free and you want to. I still believe you will not have tax to pay, but I do not have information to make that call.

Thanks again.

Customer/p>
Expert:  PDtax replied 5 months ago.

Hi again.Customerhere.

If I have answered your questions, please rate my assistance using our five star rating scale.

Customer/p>

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