Mortgage Deficiency: Update On Tax Consquences
Mortgage deficiency judgments are main reason people express currently for seeking my asset protection advice. I have previously written on this Blog that most lenders do not pursue mortgage deficiencies and some of the reasons for this policy. I just recently spoke with an attorney who represents many mortgage lenders. He said that lenders continue to be inundated with foreclosures and are having difficulty managing the cases. None of the lenders he works for are pursuing deficiency judgments as a matter of course. Many lenders are planning to send 1099 tax forms to borrowers. The lenders file and send the 1099 forms to document their own tax loss. The borrower who receives a 1099 from a foreclosure must deal with its income tax consequences.
I have previously explained in prior Blog posts that borrowers can escape income tax liability associated with foreclosures, deeds in lieu of foreclosure, or short sales by filing a report of insolvency with the IRS. Most people lose properties because the mortgage debt exceeds property value, and the borrowers does not have enough other assets to continue mortgage payments. Most of these borrowers are insolvent. Also, anyone who files bankruptcy is presumed to be insolvent for tax purposes.
To be sure, borrowers concerned about tax consequences of mortgage foreclosure should consult with their CPA. The effect of receiving a 1099 from a mortgage lender is mostly a tax issue rather than a legal issue.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
