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We are facing this today, we have a short sale and the bank

Customer Question
will forgive the first mort...
We are facing this today, we have a short sale and the bank will forgive the first mort. but not the second of $30,000. Now I can and will let the house go into foreclosure which means I would owe almost $200,000 dollars. I am 100% Disabled ( I get a VA comp. check for $2833 per month and $755 dollars S.S. ) this income is tax free. My wife is 100% disabled and draws $1333 Social Security Disability. What choices do I have. Pay the $30,000 which I don't have and could not get or let the whole thing go to foreclosure and owe $200,000 which I don't have either
Submitted: 5 years ago.Category: Tax
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5/1/2012
Tax Professional: Richard, Tax Attorney replied 5 years ago
Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 56,030
Experience: 29 years of experience as a tax, real estate, and business attorney.
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Good morning. Don't pay any attention to the agent...the agent is not a lawyer and is only worried about his commission which the agent gets on a short sale but does not on a foreclosure. Pay attention to your lawyer. First, with regard to the first lien loan, Arizona's "anti-deficiency" statutes prevent a lender from suing a person for any losses on a home after foreclosure. As outlined in Arizona Revised Statutes, Title 33, Chapter 6.1, a person may not be sued by his or her lender if the property is located on 2.5 acres or less and is a single family residence or duplex. If your second lien was used to purchase the property, it would also be covered by this statute; if it was used for other purposes, it would not be. Let the lender foreclose. All the income you mention is all exempt and cannot be touched by the lender if they do pursue you on any deficiency on the second lien.

 

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Customer reply replied 5 years ago
what about the tax liability on the 1099's
Tax Professional: Richard, Tax Attorney replied 5 years ago
If this is your home, you need not worry. Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions.
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Customer reply replied 5 years ago
our second is actually an equity line of credit loan but they say we will be getting a tax liability on that and the one on the house
Tax Professional: Richard, Tax Attorney replied 5 years ago
The the Mortgage Forgiveness Debt Relief Act of 2007 is going to be applicable to both if the equity line is secured by the house.
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