The foreclosure process can affect your tax return.
It is important to know that if you receive a Form ‘1099 C’, many of us know that there is no a deficiency judgment. Therefore, Undoubtedly it’s good news. Nevertheless, the debt canceled is an income and you have to pay taxes on it. I’m sure it sounds familiar. There’re exceptions. Have you heard about something like this before, right? Do not disregard the form and take it with you. Let me tell you something. Your tax preparer will need it. There’re two debt types -secured and unsecured, as you know.
Voluntary surrender of property. This happens when you deed the house back to the lender. It is called a Deed in Lieu of Foreclosure or a friendly foreclosure. By the way, you can do this if you do not have any other liens involved. This transaction is considered as a sale of the house for its fair market value. However, the quantity of debt cancelled should be the difference between the FMV and the loan amount. Foreclosure sale. Now let me tell you something. The difference between the amount realized from the sale and the loan amount must be an ordinary income and gonna be reported as a debt canceled. You can even make some money, I’d say in case the house sells for over the amount owed.
This is when the lender accepts a discount on the loan. And so it’s considered a payment in full and the loan is satisfied. The difference between the short sales price and the amount owed on the loan must be an ordinary income. Abandonment of the property. Usually, you just permanently walk out. This is without any documentation regarding transfer of ownership. You still can realize an ordinary income if the debt is canceled. Special rules apply if the property is abandoned but not foreclosed upon by the lender.
When the homeowner proves insolvency immediately before the discharge and when the house is a qualified principal residence, the cancellation of debt income can be excluded from income if debt is canceled in bankruptcy proceeding. The new tax season is approaching. Find an experienced tax advisor to prepare your taxes, if you have to deal with cancellation of debt. Although, you could be surprised exactly how many tax preparers can not handle this matter.
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