Are you going through a Foreclosure or Short Sales?  I have several clients dealing with Boise Idaho Short Sales that have asked me about how this will affect their tax returns.  As always, I always recommend you talk to a licensed CPA and/or Real Estate Attorney.

I have one client dealing with an Eagle Idaho Short Sale that recently received a 1099-C for over $125,000!  If you are familiar with 1099’s… this is not treated as ordinary income on your tax return.  Thankfully, a 1099-C (C standing for Cancellation of Debt) may not affect you at all.

You see, thanks to the Mortgage Forgiveness Act of 2007, the tax burden for cancelled mortgage debt for primary residences may save you!  This Act which has recently been extended through 2012 is a lifesaver for people going through Foreclosures and Short Sales!  This Act allows up to 2 Million dollars (1 Million if married filing separately) to be excluded.  The key is the primary residence – this doesn’t apply to rentals, 2^nd homes, or investors.  Read more here at the government’s website.

What is “Cancellation of Debt”?

If you are going through a foreclosure or short sale, your lender is going to receive less than what is owed on your mortgage(s).  For example;

Original Purchase Price:              $300,000
10% Down Payment:                        $30,000

1^st Mortgage:                                    $243,000
2^nd Mortgage:                                    $27,000

Mortgages combined:                 $270,000

Through either the foreclosure or short sale, let’s say the lender is able to recoup $225,000 on this home.  There would be an unpaid balance of $45,000.  Nearly all the 225,000 will go to pay the 1^st Mortgage, and a small portion ($3,000) will go to the 2^nd Mortgage.

Your lender(s) may 1099-C you for $45,000, which is referred to Cancellation of Debt.

Question? Does this mean you’re off the hook for the $45,000 (even though the lender approved the foreclosure or short sale??).

Answer! NO.  You are still liable (this may depend on your state and whether you loan is a “recourse or non-recourse” loan.  Often the 1^st will be settled in the transaction, but lenders are going after homeowners for the 2^nd, HELOC’s, and if you did a loan with Mortgage Insurance… they may try to get a deficiency judgment.

In Idaho, lenders currently have 90 days for the 1^st Mortgage, and 5 years for the 2^nd to seek a deficiency judgment.

New legislation has been written to help with deficiency judgments (Program is called “HAFA”).

Like with any large decision, the discussions with a licensed real estate agent can and should get a lot more in-depth.  I hope to have gotten the ball rolling in that direction for you!

If I did, please give me a call so we can talk more about this!!  I can be reached at  208-288-2976 or at paul@Idahorealtyinfo.com.

Follow me on Facebook: homes@idahorealtyinfo.com

I look forward to talking to you soon,

Paul Wallin

Idaho Realty Info at Group One