Asked about 1 year ago - Tracy, CA
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I've read that after a foreclosure I might be handed a huge tax bill. That hardly seems fair, and I'd like to know how it works, and what if anything I can do to get out of it or have it reduced.
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No, not if the property foreclosed upon is your principal residence.
Under the federal Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012), you will not need to pay any income tax on canceled debt (which is the unpaid loan balance that is forgiven by lender) resulting from a foreclosure, short sale or deed in lieu of foreclosure if you as the borrower satisfy certain conditions for mortgage tax relief (e.g., principal residence, owned for at least 2 years, debt amount of $2 million or less). However, the Mortgage Debt Forgiveness Tax Relief Act of 2007 does not apply if the property is not a "principal residence". IRS Code section 121 defines "principal residence" as: ". . . during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more. "
For more information on debt forgiveness, 1099-A, and 1099-C, see:
http://www.irs.gov/instructions/i1099ac/ar02.html
http://www.irs.gov/newsroom/article/0,,id=17403...
There is also an IRS Publication 4681:
http://www.irs.gov/pub/irs-pdf/p4681.pdf
In the event of a non judicial foreclosure by trustee's sale, there wil be no taxes due because there is no debt forgiven - the non judicial foreclosure wipes out the debt.
Richard A. Rodgers, Esq.
(805) 230-2525
200 N. Westlake Blvd. Ste 201
Westlake Village, CA 91362
rar@sd-attorneys.com
www.sdresq.com
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