Hidden Tax Issues with Foreclosures and DIL Foreclosures

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There is a lot of wrong tax information being given out by so-called real estate “experts” when it comes to real estate losses and write-downs. There have been a couple of blog posts over the past few weeks. If this applies to you, please search back to the other posts.

A lot of people have gone through foreclosures or done deeds-in-lieu-of (DIL) foreclosures that never expected to face that. It’s easy to get caught up in the feeling of “put that behind me and never think of that again.” But when it comes to foreclosures and DIL there are some things you can’t ignore. If this is your circumstance now, please read the next section of this blog very carefully.

You will most likely receive a Form 1099-A. This shows that the lender has received property. There will be a box checked “yes” if you received cash or other property in the transaction. If that’s the case, then this will be taxable. (Unless you qualify for an exception.) At this point, the lender may still believe that they can come after you for the loss on the property. The loss would be the different between whatever they can get for the property and what you owed on it. They have up to 4 years to file against you for that deficiency. If they write it off, you’re going to get a Form 1099-C.

If you do not receive a Form 1099-C, it could mean:

  • The lenders records are such a mess through recent banking collapse that they forgot about it.
  • They sent it to you at the old property address and it was not forwarded to you.
  • They are planning on coming after you for the deficiency in the next 4 years and so have not written off the loss.

If you get a Form 1099-C, and even if it never ends up in your hands, you will have tax due on the amount of the debt forgiveness unless:

  • It’s a principal residence and the debt was original acquisition indebtedness.
  • You have filed bankruptcy.
  • You are insolvent.

In each case, you will need to complete and properly file a Form 982. If you do not (or your tax preparer does not), you will owe tax on this amount.

I can’t stress this enough! Don’t ignore this issue. If you don’t file the Form 982, there is a 6 month only window to go back and correct it. If you miss that window, you’ll owe taxes. And if you’ve just gone through a foreclosure or DIL, the last thing you want is to have to pay taxes on it too! !

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