First time posting… we have a second residence that was under land contract and the buyer fled and it has been foreclosed upon. We were told that the bank would put a judgement against us and the IRS would 1099 us and take are primary residence if we were not insolvent.
How can we prove to be insolvent? Any suggestions? Thank you for helping.
You show your liabilities are greater than your assets.
Okay, so you lost the second residence to foreclosure. The bank may seek a judgment against you for any loss they suffer on the property. Or they may send you a 1099 which means they are reporting the loss as income to you with the IRS. The IRS is not going to tale away your primary residence just because you have a foreclosure on your record.
There is a lot of misinformation in what you were told.
Your second residence was taken by foreclosure because you defaulted on your mortgage loan. If the foreclosure sale did not generate enough to pay off your mortgage loan and the costs of the foreclosure, the lender may seek a deficiency judgement. If a deficiency judgement is awarded, there will not be a 1099 issued for forgiven debt since no debt has been forgiven. If the lender decides to forgive any portion of your mortgage loan, then the lender (not the IRS) is required to issue you a 1099-C if the amount of cancelled debt is $600 or more.
The lender reports the amount of forgiven debt to the IRS and gives you a 1099-C showing the amount reported. This amount is taxable income to you on your next tax return.
The IRS will exclude the forgiven debt from your taxable income if you are insolvent at the time the debt was forgiven. You are insolvent if you sell everything you own and still can’t pay off all your debts. If you had filed for bankruptcy and if the bankruptcy had not been discharged at the time the debt was forgiven, you are insolvent. If you have equity in your house, if you have money in the bank, if you have income, then you are probably not insolvent.
Forgiven debt can be excluded from taxable income only to the extent of your insolvency. Any forgiven debt in excess of your insolvency is still taxable ordinary income. If the forgiven debt can be excluded from taxable income by reason of bankruptcy or insolvency, then you claim the exclusion on IRS Form 982.
The IRS does not take your primary residence when you have forgiven debt. The culprit you need to look out for is your lender. If the lender is awarded a deficiency judgement, the lender can use the judgement to attach a lien to your primary residence. If you sell the property, then the lien will be satisfied from the sale proceeds.