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What about taxes after a foreclosure?

Tracy, CA |

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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Attorney Answers 2


  1. 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=174034,00.html

    There is also an IRS Publication 4681:

    http://www.irs.gov/pub/irs-pdf/p4681.pdf

    Frank W. Chen is licensed to practice law in the State of California. The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, consult your own attorney.


  2. 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

    As stated in the AVVO.COM Terms and Conditions of Use, this answer is not intended as legal advice, and no attorney-client relationship or privilige is created by this response.