Tax Consequences Of Deficiency Judgments On Your Los Angeles Real Estate
As devastating as it may be to lose your Los Angeles real estate in a short sale or foreclosure, there may be more bad news to come. Even after your home has been sold, many states allow the lender to obtain a mortgage deficiency judgment which permits further pursuit of the unpaid mortgage amount by the lender. A mortgage deficiency occurs when the price the lender gets from the sale is lower than the amount of the money owed--which is always the case in a short sale and is usually so in a foreclosure.
California is a non-recourse state meaning holders of a second mortgage and issuers of equity lines are free to demand compensation from you for those unpaid monies.
You should also be aware of the tax ramifications of a short sale and a foreclosure. If the lender decides not to pursue a deficiency judgment or even if you live in a non-recourse state, the amount of the unpaid debt is considered income by the I.R.S., and you will be taxed on it. The lender will send you a 1099-C, and you must report this gain on your taxes. Unfortunately, you may not deduct any loss you may have taken.
There is hope, however! The Mortgage Forgiveness Debt Relief Act, passed in 2007 and recently extended to 2012, allows you to exclude from your taxable income most if not all of the forgiven or cancelled debt on your primary residence. Joint filers can exclude up to 2 million dollars; single filers up to 1 million. To claim this exclusion you must attach a completed IRS Form 982 to your tax return.
As always, it is important to consult with your realtor, lender, accountant, and/or tax attorney to correctly ascertain your status before, during, and after a short sale or foreclosure.
