The rules concerning a foreclosure deficiency are complicated and may come with unexpected financial and tax consequence. Seller is advised to make a thorough examination of its personal financial situation with an experienced tax professional and/or attorney during any foreclosure mortgage process.
The Internal Revenue Service will consider debt forgiveness by the lender as taxable Form 1099 income. Additionally, the borrower may also have taxable income in the form of capital gains from the sell or transfer of the property. Homeowners whose mortgage lenders allow them to walk away from their debt got a big break from the new Tax Increase Prevention Act just passed by Congress for 2007-2010. This recent change in the tax laws makes mortgage debt forgiveness tax-free if the loan was to buy, build or substantially improve the borrower's primary residence. Cash out refinancing is not eligible to the extent that it exceeds the original mortgage amount. Owners of investment homes still face these tax consequences unless they can show they were insolvent when the debt was forgiven or they have other investment or business losses to offset this additional Form 1099 ‘phantom' income.
PLEASE CONSULT WITH A CERTFIED PUBLIC ACCOUNTANT OR OTHER TAX PROFESSIONAL. NOTHING IN THIS MANUAL SHOULD BE CONSTRUED AS TAX OR ACCOUNTING ADVICE.