Every foreclosure situation is going to face either a 1099 or a Deficiency Judgment. They are not the same –– you can’t have them both.
The first thing you need to know is that it only applies to qualified principle residences––
meaning owner occupied.
The second is that, “Acquisition Indebtedness” is no longer subject to taxation.
A quick scenario: If I lend Tom Stufflebean 50k, and Tom doesn’t pay me back . . . the IRS will say that in certain situations Tom just “earned” 50k and therefore he must pay taxes on that 50k.
The same thing happens when a homeowner borrows 350k from the bank to buy a house, live in it, and then sells for 200k, The IRS would say that the homeowner had the benefit of a 150k gain and that he or she needed to pay taxes on it.
Except now if the money was to buy that property and it was your principle residence, it no longer is seen as a taxable gain.
Acquisition indebtedness can also mean “to build” the property: to buy the land, pay the contractor, etc.
It can also mean money for substantial improvements such as a remodel and rehab.
For most purposes, acquisition indebtedness is covered, unless you took money from a home equity loan, used part to rehab the house and the other part to take a trip to Bali, you now have a tax issue.
How much was used to improve the house? How much was used for the vacation?
Clients need to talk to their tax advisor about how HR3648 applies to them.
Now there’s another little kicker for those in the luxury market –– or for those of us in California –– up to a million dollars in acquisition indebtedness is covered. That’s it.
Married and filed separately, it’s half a million dollars.
So, a rich divorcee buys a 2 million house at the peak of the housing market, and then ends up having the house sold on a short sale for one million, he or she will only be able to avoid paying taxes on half of the amount (500k).
What’s not included in HR 3648?
Non-acquisition indebtedness: If the bank forgives the cost associated with the loan in foreclosure (penalties, late fees, foreclosure costs, attorneys fees), then the bank may issue a 1099 for that part –– it’s not wipe out by the legislation.
If an individual is in a Chapter 11 bankruptcy. Why? Because you get a lot of people who are self-employed that put their house up for collateral on a small business loan. The good news is that these people have another way out . . . the bad news is that HR 3648 doesn’t apply to them.
Finally, if the lender does file a 1099, the homeowner simply needs to prove his or her insolvency during the time of the foreclosures.
We’ve negotiated hundreds of deals over the years, and on only two or three occasions has a homeowner called us with this issue . . . which has always been quickly resolved.
For more info, see: