What does abandonment of property mean for federal income tax purposes?
Abandonment of property occurs when you permanently give up possession of a property and represents a total loss of your investment or interest in the property. Abandonment of a home is not a deductible loss for federal income tax purposes.
What is the difference between a 1099-A and a 1099-C?
When the debt for a loan is forgiven, the amount of debt canceled may be taxable. The lender must report the amount of the canceled debt to you and the IRS on form 1099-C (Cancellation of Debt), or a 1099-A form (Acquisition or Abandonment of Secured Property). These are issued both in a short sale (form 1099-C) and in the case of foreclosure (form 1099-A).
What is a Notice of Default?
A notice of default is usually the first step towards foreclosure. It is a public notice that is filed when a homeowner is behind on mortgage payments (has “defaulted” on a loan). Lenders typically file a Notice of Default when a homeowner is 60 days or more behind on payments.
What is foreclosure?
Foreclosure occurs when a homeowner defaults on the loan with the lender and can no longer make mortgage payments. In these cases, the lender has the right to sell the property at auction if the homeowner cannot catch up on payments, adjust the terms of the mortgage (loan modification), or sell the house, either through a regular sale or a short sale. Foreclosure on a credit report usually causes credit scores to drop 200-300 points, and can prevent you from buying a new home for a minimum of 4 and up to 7 years.
What is a “Deed in Lieu of Foreclosure” and how does it affect your credit score?
If a borrower cannot make mortgage payments and wants to avoid foreclosure, he or she may be able to hand the property back to the lender, who then auctions the property and retains all the proceeds from the sale. Legal ownership is transferred to the bank and the borrower receives a note marked as “paid” from the lender. Deed in Lieu remains on your credit report for 7 years and can cause your credit to drop 250 points (depending on what your credit score was before), meaning that it has a credit impact similar to that of foreclosure.
What is the “deficiency” in a short sale, and is the seller responsible for repaying this amount to the bank?
The deficiency in a short sale is the difference between the mortgage balance and the amount of the short sale. This deficiency is usually counted as taxable income and must be declared on IRS form 1099-A or 1099-C. However, under the provision of the Mortgage Debt Relief Act of 2007, the amount of cancelled debt is usually not considered taxable income.
What is does BPO mean?
BPO stands for “Broker’s Price Option” and is a special short sale appraisal. It is similar to a standard appraisal, but usually costs less. In a BPO, lenders hire a real estate broker to give their opinion on the value of a property. This opinion of market value is usually based on the comparison of three similar properties that have sold recently, and the appraisal is adjusted upwards or downwards based on the condition of the property being appraised.
What is a Loss Mitigation Department?
The Loss Mitigation Department, also known as the “Short Sales Department,” is the department in the bank that evaluates applications for and makes decisions about short sales for the lender.
What is the difference between a judicial sale and a power of sale in a foreclosure?
In a judicial sale (available in every state), the lender files suit with the court system and the court demands payment from the owner, who usually has 30 days to make payment. If payment is not received, the lender can request that the property be auctioned, and the auction usually takes place several months after the request is filed. Once the home is sold, the owner is issued an eviction notice by the sheriff’s office and the property must be vacated. In a power of sale (allowed in most states), after the lender demands payment and does not receive it within a predetermined time, they are legally allowed to draw up a deed of trust that temporarily transfers property ownership to a trustee. The trustee then auctions the house on the lender’s behalf after the lender posts a notice of public auction (usually required by law). The eviction proceeds as in a judicial sale.
What is the Mortgage Debt Relief Act of 2007?
The Mortgage Debt Relief Act was passed in 2007 and applies to debt forgiven between 2007 and 2012. In cases where a 1099-A or 1099-C is issued, the homeowner is generally not responsible for paying taxes on the amount of cancelled debt because the Debt Relief Act allows taxpayers to exclude income from discharge of debt on their principle residence.