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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am in Los Angeles, California. I am currently working

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I am in Los Angeles, California.

I am currently working on a loan modification.

I understand that if I do a short sale my principal residence or a deed in lieu I will have debt forgiveness on deficiency amount;
What happens if I get a loan modification?
What happens if I get foreclosed?

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.

Robin D. :

Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.

Robin D. :

If any part is forgiven under either of your options posted you would have taxable income to deal with.

Different expert here - Welcome. My name is XXXXX XXXXX it will be my pleasure to assist you with your tax question today.


You mentioned that the property is your principal residence, so the following will apply:


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 (such as a modification), 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). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.


I hope this additional information is helpful to you, but if you have any additional questions, please come back to me here.


Thank you and best regards,


Customer: replied 3 years ago.

I understand that if Foreclosure, Short sale or Loan Modification happens to me before 2013, any deficiency amount will be forgiven. In my case, I will run into 2014 and conclude any of the above in 2014, How will my tax consequences or the debt forgiveness change?


Thank you for your follow-up question.


Please note that a few months ago, the Making Home Affordable (MHA) programs were extended by the federal government through December 31, 2015. Even though the Mortgage Forgiveness Debt Relief Act is not part of the MHA programs, extending it is being made a top legislative priority so that it coincides with the MHA program deadlines.


If it is not extended, then the cancellation of debt will be taxable income, but you may be able to utilize Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income. Any remaining canceled debt, if any, would be included as income on your tax return.


Please let me know if I can assist you further.


Thank you and best regards,


Hi and welcome to our site!
Unfortunately neither previous experts noted that you are in California.

As I know California is a non recourse state - and you should not expect form 1099C and would not need to use form 982..
A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.
Forgiveness of a non-recourse loan resulting from a short sale or foreclosure does not result in cancellation of debt income.

So with either short sale or foreclosure - from tax prospective.- the disposition of your property will be treated as a sale at the amount of the mortgage outstanding.
Thus - from the tax prospective - there will not be any difference.
What I suggest to confirm with your creditor that your mortgage indeed is a non recourse loan.
Let me know if you need any help.
Customer: replied 3 years ago.

Ok...So for clarification... I am not liable in California which I know is a non-recourse state, for any deficiency amount right?


Does this apply to my primary residence only or same for other investment properties?


That is correct.
Forgiveness of a non-recourse loan resulting from a short sale or foreclosure does not result in cancellation of debt income.
That applies to all properties used as a collateral for non-recourse loans.
The primary residence would have a non-recourse loan.
Investment properties might have either recourse or non-recourse loan.
In case of non-recourse loan - the balance of mortgage outstanding is treated as the sale price.
For the recourse loan - there would be COD income and the sale price is equal to the fair market value of foreclosed property.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29789
Experience: Taxes, Immigration, Labor Relations
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