Foreclosure and Short Sale – What Are the Consequences You Should Be A…
The housing market landed with a resounding thud in 2009 and the USA saw a rapid increase in foreclosures which in turn led to many financial lenders being put out on the street. An unsuccessful stabilization by the Government was tried. Their focus was to provide money to the financial mortgage institutions and not to the owners of the homes. In most instances, the tax payers will be provided with a tax form, known as 1099-C if they have had to go by the time of action of a short sale or an actual foreclosure. Due to these instances, the financial mortgage lender is responsible for providing these 1099-C tax forms and in turn will not be pursuing a judgement deficiency. This was said to be great news. With this method, the debt amount that is voided is then shown as an income. Keep in mind that there are always exceptions to the rule.
Below are some of the exceptions to the rules that you will find.
Exception A – If you have had a foreclosure on your house, box # 2 on your 1099-C will have this amount written in as a forgiven debt. Under usual circumstances, during the short sale of your home conducted by the local authorities, the financial mortgage lender will buy your home back from you and it will then become what is known as as R.E.O., also known as a Real Estate Owned. The financial lender’s dominant intention is to re-sell the home in the fastest time possible, however in some instances this could take them literally months to accomplish. There is a light at the end of the tunnel however, the cancelled debt amount will be done by the Fair Market Value of the home, which you can locate in box # 7 of your 1099-C tax form. This is an basic aspect as the differing amount between the loan amount and the Fair Market Value is the amount that you should be concerned with and this amount will be shown in box # 2. Keep in mind that if this is your dominant place of residence, The Mortgage Debt Relief Act of 2007, states that the cancelled debt amount is not placed as an income to you.
Exception B – If you have had a short sale on your house, this technically method that your house was sold with your financial lender’s okay at a discounted rate. For the short sale you will nevertheless get a 1099-C tax form. When the calculation of your cancelled debt is done, they will utilize the actual price that you bought your home for. Keep in mind that if this is your dominant place of residence, The Mortgage Debt Relief Act of 2007, states that the cancelled debt amount is not placed as an income to you and a tax form 982 must be prepared.
Exception C – If your cancelled debt is a rental character or another kind of business debt, the character loss will be recorded as a sale. In this example, you will be excepted to calculate the loss or gain. In order to make sure this is done correctly, it is advised to hire an experienced specialized to help you deal with the debt cancellation.
Exception D – The income from a debt cancellation will be excluded from an insolvent purchaser to the extent that liability will go beyond that of the Fair Market Value of all the assets. In other words, if you have a debt to asset ratio in favor of debt, you have to choice to neglect a specific amount from the amount of your income. EXAMPLE: If you have a cancelled debt in the amount of $100,000.00, and you have $180,000.00 in limitations and $150,000.00 in assets, you can absolve $30,000.00. This would leave you with reporting $70,000.00 instead of that of $100,000.00.
Exception E – This is extremely basic! In some instances, if you are married and both of your names are on the deed of the character, you can get two 1099-C tax forms and be able to cancel the complete debt amount. This is in place of one form made out to both persons on the deed. This would be an basic conversation to have with your tax specialized. You never want box # 2 amount to be twice reported on the form.
Exception F – The income from a debt cancellation will be completely excluded upon the release of a bankruptcy.
The above details can assist you in understanding the ins and outs of short sales and foreclosures and the effect that they have on your taxes. Knowing the consequences up front helps to keep from being blind sided down the line.