Do I have to Pay Taxes after a foreclosure?

Question

I am getting my home foreclosured. The house I am getting foreclosured is in Arizona. It is my only house, So it's my primary recidence. I bought the house for $200,000, and now it's worth about $125,000. So, I want to know if I have to pay taxes for the difference of the house ($75,000).

Answer 1

This is a loss so your annual tax return this can be claimed as a loss.

Once foreclosed your not obligated to pay anything. The bank who forcloses is now responsible for the taxes on the property. At least in Texas that is how it worked.

They generally set the forclosue date and the minimum bid is the balance on the house. Then the bank will sell it at a later time to someone else.

Answer 2

Normally when debt is forgiven you get a 1099-C and pay taxes on it. A law was passed that said if your home debt is forgiven and it is a non recourse loan then you will not be taxed on it. Most acquisition loans for homes are non recourse. You can walk away. You need to check this. If it is a recourse loan, as most refis are, then you must pay taxes on the amount. It is not a loss on your taxes. This law applies to 2007, 2008, 2009.

Answer 3

Is this a recourse loan?

If yes, the $75,000 is cancelled debt income, but can be excluded using form 982 and electing the gimmie congress gave you.

If no, you effectively sold the house back to the bank for the amount of the loan.  Which in your case, same result on the schedule D, no income.

The question becomes whether or not your state forgives cancelled debt income.

FYI, a loss on the sale of the home is NEVER deductible.

Answer 4

Is the mortgage for purchase money to buy the house or is it a refinance.  If it is purchase money and the lender's ability to recover is limited to the value of its collateral--meaning the worst it could do to you is take the house back--then you will have no income from discharge of indebtedness.  I'm your neighbor in California and that is how it is here.