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HERE are some of the questions and advice from different blogers online that I picked up and thought these would be general questions for a lot of you who might have the same concerns.
Hi all
It seems many sellers are suddenly choosing the route of foreclosure as opposed to paying the taxes due on the 1099 received in a short sale. Is there any way around this? I believe that we are losing a lot of opportunities to stop foreclosure and actually help the owners and economy. Most people want to do the right thing and work with the bank but fear the ramifications of the IRS. I have heard that there are exemptions and would love to see some official documentation of the guidelines. I have also heard mixed reports about foreclosures also sending out 1099’s. Deed in lieu too? What is the "LAW"? Thanks so much to all who responded!
Blogger hello
A 1099 is not a side effect of Short Sales it is a reality for ALL forgiven debt. (it’s actually a 1099C in our case). If you work out a deal with your credit card company, for instance, you will also get a 1099. Any forgiven debt is subject to the 1099C, including a Foreclosure.
There are legal ways to work around the total amount reported on the 1099 that can bring down the forgiven amount...they include proof of insolvency or if you have other substantial debt you can "write down" the amount reported on the 1099C thereby lowering the tax amount. It is better to refer you client to a CPA so they can go over any options they may have depending on the situation.
If people believe they are getting away from the 1099C by letting the property foreclose then they are mistaken. The 1099C can be even higher in a foreclosure because the lenders are allowed to ADD their expenses from the foreclosure and subsequent sale.
There are many, many lawyers advising their clients to let the property foreclose and usually that will entail further legal proceedings and expense as time passes. I feel that there might be a hidden agenda because if there was ever any deficiency balance that you will have to be responsible for, your next call might be to an attorney to see if BK would be a solution. Therefore, having to file and pay for all those expenses would be your responsibility.
I think, that anytime you make a decision like taking a foreclosure you have to be well aware that a foreclosure will stay on your public record for the rest of your life. It can even impact current or future employment, security clearance and even interest rates on future loans. Long term I don’t think the instant gratification is worth the long term damage.
I believe the question is, Does the homeowner [former] get a 1099 with a foreclosure (or Deed in Lieu) as they do with a short sale. I believe the answer is yes. And they can use the same write offs with all three.
What I see happening is people are electing foreclosures because the taxes they’d have to pay on the loss it too much. They believe that a foreclosure means that they won’t get the 1099. And a couple have said that their lawyer told them that!
Another bloggers respsonse
I believe that bottom line, if the bank takes a loss on your home, you will get a 1099... there is no avoiding it. The tax write-off will still be the same either way (if it was your personal residence.)
I feel badly for these people but if their lawyer told them so, what can we do ‘cause as everyone knows, the lawyers know the right thing to do.
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