Foreclosures & Short Sales Create Tax Burden for Home Owners

Hardships in today’s economy are becoming more of a burden to many homeowners.  The sub-prime mortgage crash of 2007 has made it difficult to impossible for many homeowners to refinance as the loan programs have been limited.  Prior to the mortgage crash there were lots of creative, innovative, sign me up loan programs with stated income, low low down payments and starting payments to good to be true. These were for individuals with less than perfect credit which was the start of the fall.  Now as the payments on many of the adjustable rate mortgages go up, the borrowers who were originally planning on refinancing and having better credit find themselves in a stagnant situation.  If their credit had improved they would have had a better chance to refinance, but unfortunately many of the credit scores remained the same.  There are FHA programs out there that are providing some help, but for many self employed borrowers who show limited income this has not proved to be beneficial.

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So, now we get to the “what are we going to do” syndrome. My payments are too high and I can no longer afford the payments.  Well if you as a homeowner decide to quit making payments, you could be in a dilemma come tax time when the IRS says that you are going to be taxed for the loss that the mortgage company took when you lost your home in a foreclosure.   If you think that the loss will only be a couple of thousand dollars, you would probably be wrong.  You might owe $200,000 on a home and think it might be worth $190,000, so if you let it go back to the lender you might be taxed at the year end (when the mortgage company sends you a 1099 to report to the IRS as income) thinking you would only receive a 1099 for $10,000, & this might not be accurate.  When the lender takes the property back they could report it for $125,000 and you could receive a $75,000 1099….. Ouch.  So if you are a homeowner and think it can’t get any worse and want to just let the house go, you might think again.  Uncle Sam will collect their money and the mortgage company will write off the loss at your expense.  It is important to manage your loss and limit your tax liability. Below you will find some helpful IRS forms that may assist you to evaluate your position.

On a foreclosure when the debtor was foreclosed upon, a creditor may file a Form 1099A (ref: ).  On the 1099A, the Creditor reports the Fair Market Value of the property in additional to any outstanding principal balance.

On a Short Sales the creditor may file a Form 1099C (ref: ) which could be a lower tax burden if you assist to manage the loss.  Lenders who cancel a debt will file a 1099C with the IRS.  This form reports the amount of debt that was cancel.  And, according to IRS instructions accompanying the form, the debtor must include all canceled amounts on the “Other Income” line of Form 1040.

Sellers finding themselves in short sale or foreclosure situations may want to refer to IRS Publication 523 – Selling Your Home (ref: ) for tax information.

In difficult times we assist homeowners by helping to manage their loss.  In most cases when a hardship arrives we have years of experience in negotiating with the lender to reduce a loan amount in the event of a short sale so the homeowner does not have to bring money to closing.  If you need someone to help in your evaluation for the sale of your home, please call today.  If you know of someone that this article will benefit please forward this for their reference.

For buyers, there has never been a better time to buy real estate.  So, if you are serious about buying or selling a home in today’s real estate market, for a no-obligation confidential and professional consultation contact Keith W. Smith, Broker, REALTOR®,, 469.877.3766.

Notice: This information is provided for informational proposes only and is not intended to provide tax advice.   You should seek tax advice from your attorney or qualified tax professional.


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