My guess is that it was a mistake.  Wasn't the property listed in the bankruptcy??  If he failed to list it, he can correct that.

Getting a 1099 for liens discharged in bankrputcy is insane.  Can only be a mistake.

He was never in a bankruptcy Lenn

In the past, homeowners were taxed on any amount forgiven by a lender in a short sale negotiation or foreclosure, which created a tremendous financial burden.  Now, under The Mortgage Relief Act (click here), the loan amount written off by a lender will no longer be considered taxable for debts forgiven between Jan. 1, 2007, and Dec. 31, 2009.  I hope your seller's foreclosure fell within that timeframe.

His home foreclosed in January or February of 2007. I really don't know how they would determine if this is his owner occupied property since he owned another home in Brentwood..

Wow Mike what a mess,

I do not deal with foreclosures in our marked, But have tried to purchase a few in the Denver market and lenders continue to shoot themselves in the foot.

That's true Jason and Deanna, but some of the deals do come together.

Mike:  There's no hiding from the IRS with bankruptcy...unfortunately.  Not sure how it goes with proving insolvency.  Sounds like your clients needs an attorney. 

Mike, like Margaret, I thought the banks could no longer send 1099 for homes that foreclosed during that time frame?  Hopefully her link can help your client.  I wonder if the IRS has information, I am sure your client is not the first person this has happened to.  Good luck to your client.

 Chris:It does sound like My client needs an attorney.

Audrey June: George Bush did pass the mortgage forgiveness act how does that apply to owners in California with multiple homes?

Mike, I have to say I am not sure.  I will have to study the bill.  I hate to say it though, do you think they will be lenient to people with multiple homes or the folks that have lost their only place to live?  This is good information I need to check on.  Thank you for bringing it to our attention.

Audrey I would say they would be more lenient to a seller owning just one home as their owner occupied.

IRS Form 982.  Good luck!

Mike, wow I can see why your seller would be panicking. Almost sounds like a mistake, but unfortunately now they have to work through it to defend themselves. Best of luck to you and them.

Thanks Duane, and thanks for the invite to your group I did join...

Mike, welcome to the group, glad to have you on-board. Look forward to reading your ThemThem posts.

Duane thanks again for the invite.

If the house was foreclosed upon, not a short sale, than the lender shouldn't be sending a 1099 because they didnt' forgive the debt.  They should be suing him for deficiency, assuming that CA allows this.  Then the deficiency can be discharged through bankruptcy.  Based on what you've written about this, it appears to be a mistake on the lender's part.

Mike,

Your question is what should you do?  What you should do is have him contact a tax professional.  Real Estate agents should not be giving tax advice.

You're right Craig and I did advise my client to do just that.

Mike, I agree with Craig that having your client contact a CPA or tax attorney is the best course of action. When I am working with a client facing foreclosure or considering short sale, I recommend up front that they do this so they can a full understanding the potential tax implications going into the transaction.

Craig and Bonnie I'm sure you read this post. If you look at the website that's highlighted in blue it's steering my client to a CPA, I'm not telling him what he should do. Sorry for the confusion.

MIKE, With the Mortgage Forgiveness Act the tax penalty for the foreclosure does not apply since it is retroactive to January 1, 2007. that only applies to your primary residence, which can be describe for any residence that you lived in for at least 2 of the past 5 years. If they qualify those criterias I would get his CPA to send the documents proving the criterias have been met. Hope that helps and your clients qualify.

What a crazy mess. The banks refuses $540K offer and now is selling it for $399K?

MIKE, Also, please understand that the 1099 will be sent by the lender which is required for them to do. You clients have to fill out Form 982 to have the amount deducted from the gross income. That is the way this process works for the amount to be ignored as income.

Thanks for the information Sidney.

This is what makes me so mad about some of these banks, that 1099 could have been for $10,000-$20,000 but instead they purposely took a loss on that property to dump it quickly and who pays for it? Your client and us tax payers!

It's unfortunate Todd, thanks for the comments