Some homeowners in financial distress think that they can just let their house go back to the lender through foreclosure or short sale and they will be able to move on with their lives. What they don’t realize is that there are repercussions after foreclosure or short sale. One of those repercussions is taxable income from cancelled or forgiven debt.
In a foreclosure or short sale situation, the lender may forgive the remaining balance of the loan. This is good for the homeowner because it relieves them of what is often a large deficiency balance, but doesn’t mean they are completely off the hook. Under the tax law, cancelled or forgiven debt is considered income to the borrower and the lender is required to send the borrower a 1099c– a tax form used to identify cancelled or forgiven debt.
Having to pay taxes after the homeowner has lost their home is less than ideal. Fortunately, the tax law also spells out circumstances when a homeowner will not have to pay taxes from forgiven or cancelled debt. These exclusions include the following:
- Debt canceled when a person is insolvent.
- Debt that qualifies under the Mortgage Forgiveness Debt Relief Act
Before choosing to do a short sale or let the property foreclose, the homeowner should consult with a competent accountant to identify what tax consequences they may have to deal with. They should also ask about the exclusions listed above.
The Frei Team specializes in Southern Utah Foreclosure prevention and short sales in Southern Utah. If you are facing foreclosure or considering a short sale, contact us now. We can help you understand your options and answer your questions.