Foreclosure Defense Florida

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!

3 Comments

  • Mark says:

    I had a Deed in Lieu on my vacant lot mortgage 11/2009. It is tax time and have still have not received a 1099, what should I do?

  • Sheryl Hebert says:

    Hi Matt.

    I have not paid my March mortgage payment, nor do I intend to. I bought my condo almost 3 years ago (this May) and am now deeply under water. I have a interest only mortgage, owe $209,000. The current listing and pending sales in my association range from $165,000 to $170,000….this makes me $45,000 under that will take 15–20 years to make up. My husband and I are facing financial hardship due to health concerns as well as him having been laid off in Sept. of last year. We can no longer make the payments.

    I have researched my options, but am unclear about the tax (1099) repercussions. NH is a non recourse, non-judiciary state, so I feel pretty comfortable I will not be responsible for the difference in value. We have no assets anyway, so bankruptcy would be the next step. the sad thing is that I have excellent credit, but it won’t do me any good if/when I’m dead!

    I’m getting conflicting information about the taxes. I thought that if the said property is the PRIMARY RESIDENCE, then no 1099 need be filed. As well, if one has no assets, or if their debt is greater than their assets, then NO 1099 need be filed.

    I’d appreciate some help with this question. I’m meeting w/ a realtor this week and will make an attempt at a short sale, but I’m not hopeful.

    Sincerely

    Sheryl

  • Well. I was able to beat the IRS What these these IRS lawyers says sounds little hard to understand, but they completely showed how to make a very cool deal.

Leave a Reply