Mortgage Foreclosure On Rental Properties And Tax Ramifications

by Richard K.
(Wisconsin)

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Mortgage Foreclosure On Rental Properties And Tax Ramifications

If a rental property I own gets foreclosed, do I have to claim anything on my tax return for that year? I live in WI and the house is in IL.

Mortgage Foreclosure Answer:

by Mortgage Foreclosure Expert - Dan North

First let me state clearly I am not an accountant or tax attorney. I can provide you information and links for further study but you should consult your tax preparer or the IRS to determine if you may have any tax liability.

With that said you are basically asking if there will be Imputed Income from debt forgiveness that you can be taxed on.

Illinois is a Judicial Foreclosure state and does allow for Deficiency Judgments. If your lender wins a Deficiency Judgment against you for unpaid principal balance not covered by the foreclosure sale, you will still owe that money and there is no taxable event that occurs. You need to see Illinois Foreclosure Law. You should be looking into either a Deed in Lieu of Foreclosure (DIL) or a Consent Foreclosure if you want to avoid a Deficiency Judgment in Illinois.

If your lender does forgive the debt it is Imputed Income. The difference between the remaining amount of principal you owe and the current market value of the property is reported by your lender to the IRS on Form 1099‐C as debt forgiveness. In some cases, debt forgiveness could be taxed as income.

The amount of debt forgiven must be reported on IRS Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness this form must be attached to your tax return.

You may have grounds for exclusion of income realized as a result of debt forgiveness due to insolvency or business losses and should consult IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments.

Here is a short list of links for further information on your question:

Ten Facts about Mortgage Debt Forgiveness

IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

IRS Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness

Illinois Foreclosure Law

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