Imagine going to the mailbox 6 months after you lost your home in a foreclosure to find a 1099 from your old mortgage company for $45,000. This scenario has happened to a lot of people who have lost their home to foreclosure and it is completely legal that the mortgage company does this.
However, for the time being, Congress with the passing of the Mortgage Forgiveness Debt Relief Act of 2007 has temporarily provided a way for homeowners to exclude the forgiven mortgage debt income from the 1099 that they will get from their mortgage company after a foreclosure. In other words the Act allows a homeowner who lost their home in a foreclosure to have their mortgage debt forgiven through the IRS.
What Happens To My Mortgage After Foreclosure?
Following the foreclosure process on your home, where you are now out of the home and the mortgage lender owns the home, the mortgage lender wants to get as much of their money back that they loaned you. Mortgage companies make money by loaning money not by owning property so to get their money back, they sell your home in a short sale.
In order to sell your home, the mortgage company must release their mortgage on your home. This means that if they sell your home for less than your mortgage balance the mortgage lender loses money. Typically, the mortgage company will consider the difference between what you owed and what the bank sold the home for as income to you and for this they would send you an IRS Form 1099.
What Is An IRS Form 1099?
A Form 1099 is a commonly used form to report income to the IRS. Unlike a W2 where taxes are taken out, a 1099 doesn’t show any taxes being taken out of the income that’s declared on the form. The person who issues the 1099 reports this income to the IRS. The person who has the form issued to them has to pay taxes on the amount of money that is reported as income on the form. If you get a 1099 issued to you, the IRS will look be looking for it on your tax return to make sure that you have accounted for the taxes that you owe on that income.
No Taxes After Foreclosure Process – At Least Temporarily
One of the worst things about foreclosure in the past has been getting a 1099 income statement from the mortgage company who foreclosed on your home. But, due to the huge number of US homeowners losing homes to a foreclosure, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. This act temporary allows a homeowner who lost their home in a Foreclosure Process and received a 1099 to exclude cancelled debt on their primary residence on their IRS Tax Return.
Under this Act, through the end of 2009, if you lose your home to a foreclosure you will not have to pay taxes on the unpaid mortgage balance that you owed on your home as previously discussed in this article. This only applies to owner occupied homes. If you bought a home as an investment property, and lose it in a foreclosure process, chances are you will still be paying Uncle Sam their share of taxes.
In any case, if you lose a home to a foreclosure, make sure that you consult with your tax advisor or CPA to determine the tax implications of foreclosure on your taxes.
