I purchased my home in April of 2006 for $675,000, no money down. It is now worth roughly $525,000 and I am facing foreclosure. I have not re-financed and my understanding is that I have a non-recourse loan. Will I owe the IRS taxes when my property is foreclosed on?
2007-09-25 04:40:51 · 7 answers · asked by J William 1 in Business & Finance ➔ Taxes ➔ United States
If you are personally responsible for the debt, the bank will send you a 1099C for the amount of the loan the bank has cancelled. You will report that as "other income" on Line 21 of Form 1040.
2007-09-25 04:52:35 · answer #1 · answered by ninasgramma 7 · 2⤊ 2⤋
You may not have to pay full taxes. Read this from IRS:
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Bankruptcy: ....
Insolvency: .....
Certain farm debts:.....
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
2007-09-25 13:35:15 · answer #2 · answered by MukatA 6 · 0⤊ 0⤋
The sale of your home is not the only alternative.
There's a good chance I can help you, especially if whatever caused your hardship is resolved and you have more than three weeks before the property is going to be sold at foreclosure auction. You can look at staying in your home until the market is better.
It may not be as bad as you think! If you want to stay in your home, that may actually be possible. If you don't want to stay, I can also help you with the sale by negotiating a "short sale" with the lender, or offering the lender your deed in lieu of foreclosure.
If you will get in touch with me directly with your phone number or email address, I'll send you some information.
2007-09-27 22:47:32 · answer #3 · answered by Anonymous · 0⤊ 0⤋
Wayne Z is absolutely correct. Non-recourse loans do NOT trigger a COD situation as the taxpayer is NOT liable for the shortage!
In unusual cases there could be a taxable gain on sale -- foreclosures are treated as sales by the IRS -- but from what you state that is not the case here so I'll skip the gory details on that scenario.
2007-09-25 13:50:14 · answer #4 · answered by Bostonian In MO 7 · 3⤊ 1⤋
You should be OK.
With a non-recourse loan, there is no Cancelation of Debt income.
Edit:....(for everyone)
There is a difference between how recourse and non-recourse loans are treated in the case of a foreclosure.
With a Recourse Loan, the debtor is liable for the remaining balance on a loan. If the mortgage company writes this balance off, it is considered income. With a non-recourse loan, the debtor is not liable for the shortage and, as such, there is no income to report.
Most mortgages are Recourse Loans with one major exception: All first mortgages in California are by law Non-Recourse loans.
2007-09-25 11:53:13 · answer #5 · answered by Wayne Z 7 · 1⤊ 2⤋
When a preson defaults on a loan tha was not included in a bankruptcy the lender sends them a form 1099 for the amount of the loan that was not paid back at the end of the years and this money is considered income.
2007-09-25 11:50:24 · answer #6 · answered by ? 7 · 1⤊ 2⤋
MSN has a good article explaining all this today.
2007-09-25 12:28:59 · answer #7 · answered by Anonymous · 0⤊ 0⤋