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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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i am in foreclosure. my home is to be auctioned off on dec.

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i am in foreclosure. my home is to be auctioned off on dec. 10th. i owe over $500,000 combined 1st & 2nd mortgages. I have a short sale in the works w/a buyer but 2nd mortgagee wanting $10,000 more then they are willing to pay. am i better of to let it be forclosed on, or come up w/$10,000 from a relative. 1st mortgage will be satisfied, 2nd will be shorted $225,000. will i have a tax liability for that amount. i am filling personal bakruptsy either way. i also oue $250,000 on credit cards. what is in my best interest. i am not able to make payments to any of these creditors due to bad health and lack of permanent employment.
Submitted: 8 years ago.
Category: Tax
Expert:  Lev replied 8 years ago.

The foreclosure itself - reportable on 1099-A - http://www.irs.gov/pub/irs-pdf/f1099a.pdf should be treated as disposition of the property at fair market value.

 

The short sale as you referred - the sale for less than the debt outstanding that is secured by the property - reportable on 1099-S - http://www.irs.gov/pub/irs-pdf/f1099s.pdf - should be treated as disposition of the property at the sale price.

The amount of debt forgiven reportable on 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf

 

These transactions are not directly connected with the debt forgiveness. Generally - the bank may try to collect the money unless you file for the bankruptcy protection. The person may sell short and still assume the debt.

 

However if the debt is forgiven - generally it is taxable, unless an insolvency exemption apply -- you should file a form 982 - to proof your insolvency - and might exclude all or part of canceled debt from taxable income.

Please see the IRS Publication 908 Bankruptcy Tax Guide - http://www.irs.gov/pub/irs-pdf/p908.pdf - with example of the form 982 on the last page.

Please be advised that you have only 6 month after tax return is due to file 982 form.

 

In additional - the Mortgage Forgiveness Debt Relief Act of 2007 signed at the end of the last year provides additional relief - http://www.govtrack.us/congress/bill.xpd?bill=h110-3648 that allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

The Act applies to qualified debt forgiven in 2007, 2008 or 2009 - and only to forgiven or canceled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

You still need to file the form 982 to claim exclusion.

 

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