One of the biggest questions that distressed homeowners in Orange County and across the Golden State have is, “Will I still have to pay Federal Income tax on any deficiency or short fall that remains after my Short Sale or Foreclosure has been approved”?
In cases of Short Sale or Foreclosure, you will be issued either a form 1099-A or a form 1099-C, both forms enable the you to write down the amount of your debt that was canceled and then factor in other information about whether you will take a loss or gain.
Every Situation Is Different
Thanks to Short Sales and Foreclosures the lender will agree to accept less money from the borrower than what was originally due on the mortgage loan; sometimes a Foreclosure or Short Sale may not result in the cancellation of the homeowners debt, when these situations occur it’s typically because the homeowner had a non-recourse loan.
What is a non-recourse loan? This type of loan means that the bank or lenders only option in a default case is to repossess the home or property. Even though a non-recourse loan may be forgiven in cases of a Foreclosure or Short Sale and it doesn’t amount to COD income. There may be additional tax consequences to consider and the homeowner should contact their accountant or income tax professional immediately.
Mortgage Debt Forgiveness Act
With the extension of the Mortgage Debt Relief Act of 2007, home owners in California and across the United States can enjoy the benefit of forgiveness on any balance that remains after their Short Sale, Foreclosure or loan modification has been approved instead of having to pay Federal Income tax on the short fall or balance that remains on their homes mortgage. Your California tax liability will depend on your situation, so make sure to check with your CPA.
To learn more about the tax consequences of Foreclosure, Short Sale or loan modification, contact Fred Sed & Associates today at (949) 272-0125.