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Foreclosure Tax Liability

By
Services for Real Estate Pros with LoanSafe.org

Will I have a tax liability if I walk away from my home and let it go into foreclosure? It seems like more and more homeowners are deciding to strategically default on their mortgage as they walk away from their underwater homes. With real estate values plummeting and no end in sight for struggling borrowers, it seems like the smart thing to do is just leave it all behind. But the facts are that people need to get educated on exactly what implications they may face in the future if they do decide to walk away from their debts.

Often when a homeowner goes through foreclosure or performs a short sale on their primary residence, the lender will usually cancel or excuse the debt and file a Federal form 1099-A, acquisition or abandonment of secure property, or form 1099 – C, cancellation of debt, that provide the amount of debt canceled, information to compute gain or loss, and whether the taxpayer is personally liable for the debt. The reason they do this is because in most states, a purchase money loan is considered non-recourse. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from this discharge debt on their primary residence. However, this law does not cover Investment Properties and second homes. Those borrowers may have to pay income on this canceled that.

Please also be aware that you might have state taxes that may be due on this canceled that. However, in states like California they have similar laws such as the Mortgage Forgiveness Debt Relief Act that which just extended by Governor Arnold Schwarzenegger on April 13 that allows taxpayers who had all or part of their mortgage balance on their principle residence forgiven by their lender to exclude the forgiven debt from California gross income. It is always wise to consult with a tax and real estate attorney when you are going through the foreclosure process to obtain the correct legal information to successfully protect you and your assets.

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