1099-A After Foreclosure

[MNforeclosure]

My question involves a foreclosure in the State of: Minnesota

Our primary residence was foreclosed on in 2009- the redemption date was 10/26/09. The house is still empty, has not been put on the market yet to resell.

We just received a 1009-a

box 2. balance of principal outstanding was 203,000.

Box 4. fair market value was 225,000.
Box 5. personally held liable, yes was checked.

My question is - in all the research I have done on the IRS website usually the FMV is less than the principal amount owed. Will we have to pay taxes on this? We should qualify for the mortgage forgiveness act of 2007, as it was our primary residence and the situation was beyond our control, and we tried to work with the bank- even working with our local CDA and MN Dept of Commerce.

I have checked into the state statutes and MN conforms to Federal.

I had also read that if the lender sends you a 1099, that they cannot come after you for the deficiency...is that true?

[Mr. Knowitall]

You should not have any federal tax liability for the debt. (Read this.)

The issuance of a 1099 does not impact a creditor's ability to pursue any debt that has been written off, assuming they're otherwise entitled to pursue the debt.

[MNforeclosure]

Thank you for responding, I have a few more questions.

Will we also receive a 1099-C? Can you be taxed on the same thing twice (meaning 1099-a & 1099-c in different tax years?) I was surprised to get this before the house was resold.

I also disagree with the fair market value, as houses in this small town (even brand new) are selling for under 200,000. Should I call them and ask them why they came up with the 225,000 as fmv?

How do I find out if the foreclosure was judicial or non-judicial? We received notification of the foreclosure 6 weeks before the sheriff's sale, and then we had a 6 month redemption period. It's my understanding that in MN if they go through a non-judicial foreclosure the lender cannot persue a deficiency judgment. Although now I'm having trouble finding that on MN statutes website.

[solara1973]

You cannot be taxed on a 1099-A and a 1099-C. In fact, you don't use the 1099-A for filing income taxes unless you had a 'gain' where the FMV was higher than the outstanding principal. You would then use the difference as the gain on a sale and put that on your Schedule D. Capital Gains would be involved if your 'gain' was high enough or you didn't live there long enough.

Since you qualify for the Mortgage Forgiveness Act, you will not have to pay for any income tax on cancellation of debt - but there is NO cancellation of debt so it doesn't matter since Box 2 is less than Box 4.

If they took possesion of the home, and did a trustee/sheriff sale (you received letters stating this and when the sale would be), it is a non-judicial foreclosure since they quickly took repossession and sold it instead of having to go through the long and expensive court process of a judicial foreclosure.

I do not know MN laws regarding deficiency judgments. At the very least, you do know that you had a non-judicial foreclosure, and you are not liable for any potential cancellation of debt income because it was your primary residence. You'll need to research further regarding MN deficiency judgments and non-judicial foreclosures. In California, once a home is foreclosed on non-judicially, they cannot go after any deficiency judgments.

[MNforeclosure]

"Capital Gains would be involved if your 'gain' was high enough or you didn't live there long enough."

How do I know if the 'gain' is high enough? I didn't exactly 'gain' anything, I paid into that house for 5 years and didn't gain a penny.

We lived there for just over 5 years, is that long enough?

This is so stressful! Thank you for sharing your knowledge and experiences, it is greatly appreciated!

[solara1973]

You'd be exempt from 250k capital gains (single; 500k married) if you lived in a home for 2 of the last 5 years before it 'sold'. A foreclosure is a sale to the IRS. If your outstanding principal is lower than the FMV on the 1099-A, then the difference is a 'gain'. Here's a home sale capital gains calculation site: http://www.ges1031.com/capgaincalc.asp

In your case, there's a small difference so you'd be exempt from any capital gains tax. You can't claim any losses on a personal residence.

So for filing this year with the 1099-A, you need to report the sale on a Schedule D. You may or may not get a 1099-C in the future since your lender may not have actually sold the property, but just bought the note back during auction. Again, since it was your primary residence at time of foreclosure, you are exempt from cancellation of debt income on federal taxes. For state, you'd have to look up MN laws.

If/When you get a 1099-C (you can call your lender and find out if they actually sold the property to someone else, or they just bought it back at auction), you'd have to file that during the tax year you receive it, and use form 982. Look up IRS publication 4681 for details.