Think you’re done with debt after a short sale? Think again…
Mar 5th, 2010 by D.J. Rausa
The State of California has decided to add insult to injury to those who have lost their home through foreclosure or have sold it at a short sale.
The tax break preventing the issuance of a 1099 cancellation of debt is no longer available starting tax year 2009. Previously, for tax year 2007 and 2008, mortgage companies who held second mortgages were not allowed to issue 1099s for cancellation of debt on short sales or foreclosed primary residences. Now they can, do, and will in the future.
As a result, the State of California will be assessing an income tax based on the amount of debt forgiven. A huge tax bill may result, depending on the net loss. Further, the holder of that mortgage can pursue collections of the total amount of outstanding balance. The biggest losers will be homeowners who have lost their residences.
The best way to not only avoid the tax liability but to prevent collections of the deficiency balance is to file a bankruptcy.
