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Is it true that after Jan. 1st, anyone who is foreclosed on

will be taxed on the...
Is it true that after Jan. 1st, anyone who is foreclosed on will be taxed on the difference between what is owed on their home, and whatever the bank sells it for? Is that how it works? Is that what happened before, or have banks traditionally ignored going after people for the difference? Do we have some reason to think they will start to pursue homeowners who walk away differently after Jan. 1st?
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11/18/2013
Barrister
Barrister, Lawyer
Category: Real Estate Law
Satisfied Customers: 38,689
Experience: 17 years real estate, Realtor. Landlord 26 years
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Hello and welcome! My name is XXXXX XXXXX I will try my level best to help with your situation or get you to someone who can.
.
That is not quite correct and I think that things may have been a bit turned around so I will clarify..
.
I think what you are referring to is when a lender forgives an outstanding debt on a mortgage or some portion of the mortgage is discharged due to a foreclosure. Typically any time a debt is forgiven, it is considered income to the debtor so they have to report it and pay taxes on it.

However, 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, 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)

.
This has a "sunset provision" which expires on Dec 31, 2013 currently, unless they extend it (which they likely will). So as the law stands now, on Jan 1, 2014, if a lender forgives a mortgage debt or it is otherwise discharged, that is considered income to the debtor and they have to pay income taxes on it.
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As for a lender pusuing a homeowner, if the lender pursues a non-judicial foreclosure where a trustee sells the house under a deed of trust, then by law, they can't go after the homeowner if the mortgage was used to purchase the house. If they actually file suit in a judicial foreclosure, the can pursue the debtor for the deficiency. But in CA, only around 2-3% of foreclosures are judicial simply due to the time and costs involved.
.
.
Thanks
Barrister
Barrister
Barrister, Lawyer
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One of my fellow experts pointed out that I might have painted with too broad a brush in my comments so let me be a bit more specific. If a lender has a legal option to come after a borrower after a default, like with a recourse loan, then if they forgive it in 2014, it is considered income to the borrower if the Act is not extended. But if the loan was a non-recourse loan, meaning that the lender could only look to the property for satisfaction of the debt, then it still wouldn't be income to the borrower even after the Act expires.
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Just wanted to be a bit more specific.
.
.
Thanks
Barrister
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