Created on September 25, 2012
Millions of taxpayers have received notices of default, auction or repossession of personally owned assets. Personally and economically, this is devastating for affected taxpayers. There is cancellation of consumer debt by credit card issuers, banks and other financial companies. There is also cancellation of mortgages on personal residences, rentals and vacation homes.
A common relief of debt situation happens upon the foreclosure, short sale or abandonment of a taxpayer’s personal residence. When a homeowner is “under water,” meaning the amount owed on the mortgage is greater than the fair market value of the home, several things could happen. The homeowner could stop making mortgage payments, walk away from the property or enter into a “short sale” to sell the home for less than the mortgage amount.
A lender will most likely foreclose on the property if the homeowner stops making payments or walks away from the property. Possibly the homeowner can work with the lender to modify the loan and work out an agreement to reduce the mortgage and payments.
With this in mind we will look at what this means from a tax perspective.
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