Foreclosure Settlements and the IRS
I hope this newsletter finds you all doing well. For today’s newsletter, I would like to focus on how a resolution of your foreclosure situation can have possible tax consequences.
Sometimes it makes more financial sense to walk away from a home rather than just keep throwing good money after bad.
When a homeowner gets foreclosed on and the property is “under water” (meaning more money is owed on the note and mortgage than the property is worth), the homeowner may have three possible options for an exit strategy.
The first option would be what we call a “cash for keys” deal where the homeowner consents to a final judgment of foreclosure in exchange for possible monetary relocation assistance, additional time in the property, and a release from the mortgage debt.
The second option (if there are not any junior liens like a second mortgage) is a deed-in-lieu of foreclosure. This is when you deed your property back to the bank in exchange for possible relocation assistance, more time in the property, and a release from the mortgage debt.
The third option would be what we call a “short sale.” This is when you sell your property even though you owe more money on the note and mortgage than the property is worth. Your lender has to approve the short sale and will typically release you from the mortgage debt.
As you can see, with each of the options, the homeowner may be able to get out of the mortgage debt. Important note: while the homeowner may walk away without owing the bank any money, the homeowner may get a surprise 1099-C from the IRS. When the lender is not paid back on the full amount of the note and mortgage, the IRS can consider this debt forgiveness to be taxable income and send you a 1099-C. For more information on this important subject, click here to read Publication No. 4681 from the IRS.
Also important: I am not a tax attorney and I am not an accountant. I have, however, dealt with these issues as they have come up in our foreclosure cases. You should always speak with a qualified accountant or tax attorney when in need of tax advice. A good accountant or tax attorney can run through the numbers with you and determine if you would actually owe payment for taxes on the amount of the debt forgiveness.
If you could use a referral for a good accountant, I’d be happy to provide one.
I hope the information in this newsletter is helpful to you and your family. I hope you have a safe Tuesday morning.
Ryan C. Torrens
Consumer litigation attorney
Disclaimer: The information provided in this email does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this email is for general informational purposes only.