Spoke w/3 diff tax expert & got 3 diff answrs. Q re taxability from 1099 for home mtg after chapter 7 bankruptcy then short sale

Asked over 3 years ago - Los Angeles, CA

The question is this. I filed a chapter 7 bankruptcy and did not reaffirm my home. The plan was to surrender it. (My understanding, correct me if I am wrong), is that any 1099s I receive from a foreclosure would not be taxable at this point.

Later (after discharge) I decided to short-sale the property to keep the foreclosure off of my credit...Does this now somehow create the potential for Tax Liability since I entered into a new contract under the Short Sale. Do I just file form 982 if I receive a 1099 for forgiveness of debt income.

Also, somebody told me that starting in 2012 even mortgages discharged in bankruptcy might be taxable. Is this true. Seems wrong.

Attorney answers (3)

  1. Henry Daniel Lively

    Contributor Level 20

    1

    Lawyer agrees

    Answered . The debt that was discharged in your bankruptcy is not taxable COD income. The IRS created Form 982 for you to handle this situation. Under code section 108 debt that is discharged in a Title 11 action is not taxable for COD income. You will still most likely receive a 1099, but the income it is reporting will be excluded. In 2013 the Mortgage Debt Forgiveness Act of 2007 is set to expire and the debt canceled on you principal residence will no longer have the $2 million exclusion currently available under the Act. This does not affect the bankruptcy provision that is covered in Section 108 of the IRC.

    Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

  2. Mitchell Reed Sussman

    Pro

    Contributor Level 14

    1

    Lawyer agrees

    Answered . If you are insolvent, you should not have any tax problem.

  3. Alan D. Walton

    Pro

    Contributor Level 19

    1

    Lawyer agrees

    Answered . The chapter 7 eliminated your personal responsibility on the loan. No matter what happens after the discharge your debt was eliminated, so form 982 is the way to communicate to the IRS that your debt was discharged under chapter 11 (the bankruptcy code).

    After 2012, forgiveness of debt on your residence, without a bankruptcy to eliminate it, will again become taxable to the extent that it make you solvent. See here: http://www.irs.gov/individuals/article/0,,id=17....

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