crws
Active member
that's besides the tax ramifications when the bank 1099's you for the difference between your loan balance and what they sold it for.
the IRS views it as income.
http://homebuying.about.com/od/4closureshortsales/qt/0407TaxesForecl.htm
Block on Tax Rules for Foreclosures
"The IRS has tax rules for foreclosures or repossessions by lenders of homes of owners who have fallen behind on their mortgage payments. There can be severe and unexpected tax consequences for an owner who simply walks away because he or she has little or no equity and the lender takes over and sells the place.
"In that situation, cancellation or forgiveness by the lender of the debt usually means the debtor has reportable income, though there are some exceptions -- for instance, insolvency."
Block on Personal Liability
"An example: Brown buys a condo and uses it as a personal residence. He pays $300,000, down payment of $15,000 and takes a mortgage loan of $285,000. He is personally liable for the mortgage. When the remaining balance of the loan is $280,000, Brown defaults and the lender bank accepts his voluntary conveyance of the unit, canceling the loan. Similar condos at the time sell for $230,000.
"The tax code treats the transaction as a sale. Brown incurs a nondeductible loss of $70,000, the amount by which his condo's adjusted basis of $300,000 exceeds its market value of $230,000. No deduction for the loss because Brown uses the condo as a personal residence.
"Brown also has reportable income of $50,000 when the bank cancels the loan. The $50,000 is the amount by which the debt of $280,000 exceeds market value of $230,000.
"Enter the IRS when the mortgaged property is foreclosed or repossessed, and the bank reacquires it, or the bank knows Brown has abandoned the property. The bank sends a Form 1099-A to Brown and the IRS. Using the numbers in the example, the 1099-A indicates the foreclosure bid price ($230,000), the amount of Brown's debt ($280,000), and whether he was personally liable. Debt cancellation (here, $50,000) is taxed at the rates for ordinary income, same as for salary."
