Short Sales, Deed In Lieu and 1099-C Tax Liability
A critical question affecting homeowners who are caught in a foreclosure problem is whether they will face 1099-c tax liablity from the IRS. In short, if the lender has a mortgage on your home for $200,000 and the home is sold in foreclosure and the bank only recieves $100,000, the lender will issue to the borrower and the IRS a 1099-C Notice of Debt forgiveness. In some circumstances, the borrower would owe the IRS their maximum tax rate on that amount, so if a homeowner were is a 28% tax bracket, she could face a $28,000 tax liability. Given the serious financial consequences of this issue, it is critically important that any borrower engaged in a short sale, deed in lieu or other transaction understand the specifics involved in these transactions.
Each fact situation is different and there are ways to reduce or eliminate the tax liability entirely for the homeowner, but all of this must be taken into consideration prior to agreeing to any transaction. The general rule is that homeowners may not face liability when the transaction relates to their homestead or primary residence, but the homeowner may face liablility when the property is a second home or investment property.
Having said that, each situation and the rules that apply are complex. For advice on your specific situation, contact Matt Weidner at www.mattweidnerlaw.com!