Tax laws have been changed to protect foreclosed homeowners from paying taxes on the so-called "profit" in not having to pay off the loan. You are safe to default this coming year under theMortgage Forgiveness Debt Relief Act of 2007.
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You possibly can. This will not be recognized income under Section 108(a)(1)(E) if:
the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2013.
So recognition of income will likely not be an issue. Use the Form 982, and just make sure you check the proper box in 1(e).
Under the federal Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012), you might 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).
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. " In short, if you lived in a home you own for 2 of the past 5 years from the date of sale, it is considered a principal residence. Simply go back 5 years from the date of the sale and if you lived in the home for a total of 2 years, it qualifies as a primary residence.
For more information on debt foregiveness and 1099-C, see:
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 (who is only admitted to practice law in the State of California). For specific advice about your particular situation, consult your own attorney.Ask a similar question
There are a number of exclusions to remove cancelled debt as income. The provisions mentioned in the prior posts - but also, insolvency. If you were technically insolvent at the time the debt was cancelled - that is your liabilities are greater than the fair market value of all your assets- an exclusion is available and may apply.Ask a similar question
This is not really a tax response, but it is very much worth noting. I've seen quite a few people go through a strategic default and no one gave them the advice that they should get a deficiency waiver from the bank. The deficiency waiver says that the bank relinquishes its right to come after you for any of the unpaid debt. Receiving a 1099 for the forgiving debt does NOT release you from the debt.
You need to negotiate this with the bank and the bank may require you to pony up a little more money to get the waiver. This will be money well spent.
What we are seeing in Florida is the banks are selling the defaulted mortgages in bulk to collection agencies for pennies on the dollar. The collection agency then uses aggressive tactics to collect on the unpaid part of the mortgage. They can lien other assets, garnish wages, etc, etc. It can be real nasty for someone like yourself that could have paid the debt but did not.
I hope this adds a little useful information to the prior good answers.Ask a similar question
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