The Tax Consequences of Foreclosure are Complex Says Iowa Bankruptcy Lawyer
“When you surrender a home, banks are mandated to hand the IRS something called a 1099-C, or cancellation of debt, which details any deficiency that is owed over and above what is eventually received for the house,” explained Iowa bankruptcy lawyer Kevin Ahrenholz. “This means that the IRS typically regards ‘not’ having to pay the loan money, in whole or part, as income. If you have been forgiven the deficiency amount, this is looked at as being income, which means you can’t declare it as an expended loss. Kind of tricky isn’t it? You need to discuss these matters with a bankruptcy lawyer, or end up on the wrong side of the IRS.”
Enter the Mortgage Forgiveness Debt Relief Act of 2007. “There are exemptions that are ‘not’ considered to be income,” outlined Ahrenholz. “For example, qualified principal residence indebtedness (for most owners), bankruptcy (discharged debts not taxable income), insolvency (when total debts are more than fair market value of assets), some farm debts, and non-recourse loans can qualify.”
Bankruptcy is a complex process and it is best to consult with a skilled Iowa bankruptcy lawyer to get help to on the numerous forms, rules and regulations. “Speaking of forms, for those facing foreclosure and have debt cancellation, there are two forms you need,” said Ahrenholz. “The IRS publication 4681 outlines the debt cancellation process and the exceptions, and the IRS form 982 lays out the qualified amounts that are forgiven.” Form 982 needs to be filled out and sent in with a debtor’s tax return.
In many instances, people file for bankruptcy as a result of foreclosure and want to protect their home by filing for bankruptcy, as once they file an automatic stay kicks in. This is applicable to all types of bankruptcy filings, including those due to lawsuits, evictions, repos, garnishments, attachments, utility shut-offs and credit collections harassment.
“Bankruptcy is a tough journey and we’re here to help you get through the process,” added Ahrenholz. “If you want to ask questions about which Chapter would best suit your particular circumstances, just give my office a call. We deal with bankruptcy petitions every day. We understand how you feel.”
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Des Moines, IA 50309
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