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Would like to know if a foreclosed house is sold for an amount less than the amount owed on the mortgage, will the owner receive a 1099 for the difference between the sale and the amount owed the bank who holds the mortgage?

A CPA told me she thought that tax rule had been suspended by Obama stimulus plan. Homeowner tells me that is not true, taxes would be due on the difference between sale price and mortgage owed.

This person is going to declare bankruptcy with the hope she will not be taxed on the difference and that it will not be counted as income.

TIA, Birgit
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Would like to know if a foreclosed house is sold for an amount less than the amount owed on the mortgage, will the owner receive a 1099 for the difference between the sale and the amount owed the bank who holds the mortgage?

Maybe yes, maybe no. The real question is whether there's taxable forgiveness of debt. Here's a link to the IRS "homepage" regarding the issue and special legislation:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

This person is going to declare bankruptcy with the hope she will not be taxed on the difference and that it will not be counted as income.

On the personal relationships front, the forgiveness of debt explanation may have nothing to do with why this person is filing for bankruptcy. Something sounds off to me. She seems to know an awful lot about an arcane area of tax law to have missed the special provisions enacted as a reaction to the foreclosure crisis.

Phil
Rule Your Retirement Home Fool
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Thanks Phil. I probably stated the bankruptcy issue incorrectly. Bankruptcy in this case is because her debts - medical and the house are more than she can ever pay off. Foreclosure is because she cannot make the monthly mortgage payment and could not get it lowered. Certainly the house will go for less than she owes, so she was told that she would be getting a 1099 for the amount over the sales price that she still owed the bank. But, OTOH, she thinks that she will not have to pay taxes on that amount if she goes into bankruptcy - which might also delay the entire foreclosure it seems. Hopefully she will be seeing her bankruptcy attorney asap.

Thanks for your link, I will have a looksee.

Birgit
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But, OTOH, she thinks that she will not have to pay taxes on that amount if she goes into bankruptcy - which might also delay the entire foreclosure it seems. Hopefully she will be seeing her bankruptcy attorney asap.

She needs to see a bankruptcy lawyer as quickly as possible. She will receive a 1099 C regardless of whether or not the forgiven debt is taxable. Bankruptcy might not be needed for her to avoid taxes on the forgiven debt. If bankruptcy is required to avoid taxes, it needs to be filed before the foreclosure.
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What she needs to know is how will the 1099C affect her income for taxes and for the kids school loans - FAFSA. If the forgiveness of debt shows as income, then she might have to pay more for education and not receive the loans, scholarships, and grants the kids need to help pay for college. That would be a disaster for the two children currently attending college.

As of now she is under the impression that going into bankruptcy she will not receive any 1099 on the foreclosure, there will be no forgiveness of debt, nor can she be sued for the debt later on.



Thanks

Birgit
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Hopefully she will be seeing her bankruptcy attorney asap.

The top 10 things you can do for her are:

1. Turn that hope into reality.
2-10. See # 1.

Phil
Rule Your Retirement Home Fool
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She needs to see a bankruptcy lawyer as quickly as possible. She will receive a 1099 C regardless of whether or not the forgiven debt is taxable. Bankruptcy might not be needed for her to avoid taxes on the forgiven debt. If bankruptcy is required to avoid taxes, it needs to be filed before the foreclosure.

Yes, she does need to get with her attorney - who BTW was the person who told her she would be receiving the 1099 for the debt. What she tells me is the forgiven debt cannot be counted as income on her taxes. It would be income she really does not have, but would affect the funds her children currently receive from FAFSA/loans/grants/scholarships for college.

I sent her the link from Phil and hopefully she is reading it!

Thanks for your input in this mess.

Birgit
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Turn that hope into reality.

Phil, I am trying my best and do thank God for all the wonderful help and support of TMF boards.

Birgit
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OK - let's separate two things - getting a 1099 and it being taxable income. Just because she gets a 1099 doesn't mean the income is taxable. In fact, she probably WILL get a 1099 even if it's NOT taxable.

It is not necessary for her to file bankruptcy to make any Cancellation of Debt (or COD) income not taxable. She can use the provisions of the tax code in the link Phil gave.

On the other hand she may need to file bankruptcy for other reasons. So I'm not saying BK is wrong for her - just that it's wrong for the purpose stated: to avoid having taxable income from the cancellation of debt.

In addition to a good BK attorney, she also needs a good tax professional, at least for this year.

--Peter
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OK - let's separate two things - getting a 1099 and it being taxable income. Just because she gets a 1099 doesn't mean the income is taxable. In fact, she probably WILL get a 1099 even if it's NOT taxable.

It is not necessary for her to file bankruptcy to make any Cancellation of Debt (or COD) income not taxable. She can use the provisions of the tax code in the link Phil gave.


But...even if the 1099 is not taxable, will the forgiven debt be counted as income?

I have not a clue if the BK attorney is good or not, attorney is with a big group that specializes in BK. That is all they do. The sad thing is she is an accountant, but not at all well versed in tax law and in her situation she cannot afford both BK attorney and CPA. Therefore, I am trying to scrounge up information for her.

Thank you!

Birgit
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It is not necessary for her to file bankruptcy to make any Cancellation of Debt (or COD) income not taxable. She can use the provisions of the tax code in the link Phil gave.

If the provisions apply.
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I have not a clue if the BK attorney is good or not, attorney is with a big group that specializes in BK. That is all they do. The sad thing is she is an accountant, but not at all well versed in tax law and in her situation she cannot afford both BK attorney and CPA. Therefore, I am trying to scrounge up information for her.

Thank you!

Birgit


Bankruptcy attorney is a more pressing issue. Taxes don't necessary require a CPA and it will be almost a year before a tax return is required.
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But...even if the 1099 is not taxable, will the forgiven debt be counted as income?

Huh? Forget the 1099; it's just a piece of paper.

As both Peter and I have told you, the question to be settled is whether there will be any taxable forgiveness of debt income resulting from a foreclosure. Debts discharged in bankruptcy are not taxable by law (IRC 108(a)(1)(A)). She has to file bankruptcy for reasons totally unrelated to the mortgage. So, what's with the dithering? The only remaining question is whether the mortgage debt will be discharged in the bankruptcy, and guess who has the answer to that question. One thing I can tell you. It won't be if she doesn't get the danged thing filed.

Phil
Rule Your Retirement Home Fool
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Thanks Phil, I am forwarding all this info to her. Now she has to see her attorney and hash it all out.

Birgit
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One thing I can tell you. It won't be if she doesn't get the danged thing filed.

Absolutely, and for taxes before the foreclosure. It sounds like foreclosure has been started. The clock is ticking.
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Absolutely, and for taxes before the foreclosure. It sounds like foreclosure has been started. The clock is ticking.

Now you all have me totally confused. Yes, the house is in foreclosure and will go up for Auction in November. Her 2010 taxes were filed January 2011. She is supposed to file an addendum to those taxes now? How can she do that until she knows what price the house brought?

Since July 2010, she has been living in the house, paying no mortgage or property taxes. She lives in Ohio. I think the house went into foreclosure in December 2010.

Birgit
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Since July 2010, she has been living in the house, paying no mortgage or property taxes. She lives in Ohio. I think the house went into foreclosure in December 2010.

Birgit


Foreclosure was started in December 2010. Is the title still in her name? My understanding is the critical date is when the bank takes title to the property. If it had been necessary for a relative to declare bankruptcy to avoid taxes on a short sale, the lawyer's recommendation was to file the day before the foreclosure/short sale completed.

The 1099C is issued for the tax year that the bank takes possession of the title. Foreclosure started in December 2010. It is likely that the foreclosure is not complete, which would make the foreclosure reportable in the 2011 tax year.
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The 1099C is issued for the tax year that the bank takes possession of the title. Foreclosure started in December 2010. It is likely that the foreclosure is not complete, which would make the foreclosure reportable in the 2011 tax year.

Thanks vkg!

Birgit
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Yes, the house is in foreclosure and will go up for Auction in November.

The auction sale price is irrelevant. What is relevant is the FMV of the property on the date the bank legally takes back the property.

If they're still living in the property, I doubt that the bank has yet taken the property. But that's a state law thing, and I know nothing about Ohio foreclosures.

It's also important to know if the loan is a recourse loan (meaning that after foreclosure the bank can continue to go after her for any shortfall that wasn't satisfied by the bank selling the property) or a non-recourse loan (where the bank's only remedy is to take back the property and they CAN'T pursue the borrower for any shortfall).

If it's a non-recourse loan, there is no cancellation of debt income and there should be no 1099C. However there will be a 1099A, showing the amount of the loan that was satisfied by the foreclosure. Your friend would treat the foreclosure as a sale of the property with the sale price being the amount of the loan.

If it's a recourse loan, she'll treat the property as sold for the FMV of the property. If the FMV is less than the loan amount, that difference is Cancellation of Debt income and is potentially taxable. That's where IRC section 108 comes in.

If she meets one of the exceptions in sec 108, the cancellation of debt income will not be taxable. The most likely exception she'll meet is the one for homeowners that Phil has mentioned earlier. She might also be insolvent, which is a different exception. And if she files bankruptcy before the house is foreclosed (and I'm really not sure if the house has been foreclosed yet or not), she would qualify for the BK exception.

--Peter
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Peter~~great info! Yes, still in the house, foreclosure has not been completed. She got notice that the house is going up for auction in Nov.

Yes, bank can sue for mortgage amount not recovered in sale. That is why she wanted to do a BR. I did not mention that she has a second mortgage with a different bank who I guess can also sue. Ergo...bankruptcy might be necessary. She is afraid of wage garnishes and she barely makes enough income to feed her family as it is.

She was just afraid that the forgiven debt would be counted as income for 2011 for tax purposes as it would affect college loans/etc. I think that was part of my original question.

Birgit
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She was just afraid that the forgiven debt would be counted as income for 2011 for tax purposes

Well, we've addressed that a number of times in the thread. My guess is that there are two reasonably likely ways the forgiven debt will not be counted as taxable income - ways that do not include bankruptcy.

BK will also work, but as I've said earlier, it may not be necessary to accomplish the objective stated above.

--Peter
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