Umatilla Florida Blog

(Discalimer: I am not an Attorney nor am I a Tax Professional. I am not able to guarantee the accuracy of the following information. You are encouraged to seek professional advice on this matter).

On the question of what, if any, tax liability one incurrs from a short sale or from a foreclosure, I have assembled the following information:

1. It is important to know if a particular mortgage is "recourse" or "non-recourse". Recourse describes a mortgage which allows the mortgage holder to go after other assets of the borrower if the debt secured by the mortgage goes into default. Non-recourse means that the lender has only the value of the property itself to guarantee the loan ... the lender cannot come after the borrower personally. In general, Florida is a "non-recourse" state.

2. Since Florida can be considered a non-recourse state, the only time a homeowner being foreclosed will face a tax liability is if there is a gain on the sale. A gain on the sale will equal the value of the loan at time of foreclosure minus the basis (cost plus improvements). If this value is zero or less, there is no gain.

3. The Mortgage Forgiveness Debt Relief Act of 2007 also provides relief with respect to tax liability for the foreclosed homeowner if:

    a. The property is the principal residence

and/or

    b. The foreclosed homeowner is "insolvent"

4. A lender foreclosing on a property will usually issue a 1099-C to the borrower to document what is called "Cancellation of Debt Income". In Florida, this will usually not result in a tax liability.

For more information on The Mortgage Forgiveness Debt Relief Act of 2007, please see http://www.irs.gov/newsroom/article/0,,id=174034,00.html which is the IRS site dealing with this subject.

Geoffrey Presson

Umatilla Home Zone

Barbara L. Johnson Realty, Inc.