Santa Cruz County mortgage lending lawyer Bill Purdy is our guest author.
Taxable Debt Relief?-Do Ask- Do Tell
Are you currently facing foreclosure? Was your home foreclosed upon in the last 3 years?
Are you considering short selling your home? Did you short sell your home for far less than what was owed to the lender(s)?
Have you received a form 1099-C and/or a form 1099-A from the lender(s)? If so, you’re one the new walking wounded.
What happens now?
Why of course the self-same taxpayers who footed the Wall Street bailout, are receiving huge, crushing income tax bills from the IRS and the California Franchise Tax Board.
These tax bills are so large, most middle class Americans will never be able to actually repay the tax owed, even over time. No matter how long they live.
The IRS is now forcibly collecting taxes for the same cancelled debt the debt buyers are still trying to collect. (Remember the famous video of the water buffalo in Kruger National Park, torn head from hindquarters by a lion and a crocodile at the same time?)
Millions of Americans are getting form 1099-C and 1099-A, Information Returns.
This “information” will ripen into tax bills unless the recipient takes deliberate thoughtful action.
The resulting tax bills tend to be massive ones. Many times the tax bills purport to show that the former homeowners owe more taxes in one year than many of they actually made that year.
Very often these taxes can be completely avoided or tremendously reduced.
The truth is no one actually knows how many of these “taxpayers” actually owe ANY of the money they are now being forced to pay.
The IRS’s own form 982 contains at least three exceptions that can wipe out or substantially reduce federal and state income taxes on otherwise taxable relief of indebtedness income tax for former homeowners.
• There is an exception for debt reduced or forgiven in bankruptcy.
• There is a separate exception for taxpayers who were insolvent at the time the debt relief occurred.
• There is still another exception for Qualified Principal Residence Indebtedness.
In California, and some other states, there is a fourth HUGE exception for non-recourse loans.
And yet again, another situation: the foreclosure or short sale of a rental property can often result in little or no tax due because of the suspended passive loss rules and an IRS form 4797 ordinary losses on the disposition of the rental property. The problem is the former property owner has to know what they are doing.
Step one is the realization that you must affirmatively DO SOMETHING.
Most former homeowners have no idea what to do with the 1099-A and 1099-C forms they are NOW getting.
Tens of thousands of CPA(s) and tax preparers have no idea either. The IRS is not helping.
If you are a former homeowner, don’t keep this secret.
Do ask and do tell a competent tax practitioner if you have received from 1099-C or form 1099-A, because the government isn’t telling or helping.
The United States Government is in active partnership with the lending institutions that sent out the forms and has been since the bailout started.
If possible get to a solid tax advisor before you let your home go in foreclosure or short sale. This will maximize your options.
But even if you didn’t do this before foreclosure, more often than not, there is a way to radically reduce or wipe out the tax.
However nothing today is automatic: you must push back.
By William Purdy- Bay Area Tax and Mortgage Lawyer , Simmons & Purdy.
