While it is correct that a law called the Mortgage Forgiveness Debt Relief Act was passed, this does not change the rules regarding issuing a 1099. It only provides for an exemption under certain circumstances and may mean that you don't have to pay taxes on the amount that's reported on the 1099. Whether or not you qualify for the exemption (in whole or part) depends on your particular circumstances and the lenders don't know what your particular circumstances are and therefore they don't know who will be able to benefit from the new law and who won't be able to take advantage of the exemption. This means that the lenders still issue the 1099 and then it's up to the tax payer to prove that they qualify for the exemption. If you don't qualify under the Mortgage Forgiveness Debt Relief Act, you may still be able to escape having to pay taxes on the 1099 amount if you can show that you were insolvent just before the bank took the property back. Like the other posters have already mentioned, real estate agents are not tax advisers or attorneys and I don't want you to interpret this post as advice applicable to your particular facts. You should definitely seek the advice of a tax professional who can assess your situation. Good luck.
Foreclosure occurs when a bank repossesses a property because the owner fails to pay the mortgage. Foreclosure is not a quick process, however. Usually, foreclosure occurs when the homeowner, or borrower, misses several payments. This is called a default and starts the foreclosure process. Banks and homeowners have several options when faced with foreclosure. The home can be sold in a pre-foreclosure sale or short sale, can go to auction, or can be taken over by the financial institution and become a bank owned property (REO).
How Do Foreclosure Sales Work?
In a pre-foreclosure sale, a property may be bought from the homeowner of the financial institution holding the mortgage prior to the start of the foreclosure process. Generally, the seller is relieved of financial liability and the buyer is able to obtain a house at or below market value.
A short sale occurs when the homeowner receives an offer to buy his or her home for less than the amount owed on the mortgage, and the financial institution holding the loan accepts less than the full payoff. If the payoff on a mortgage is $150,000 and the home is sold for $140,000, the bank may accept the amount as a full payoff even though it is short, hence a short sale.
Some banks may place a foreclosed property into an auction to try and regain the lost amount on the defaulted property. The price for an auctioned house may begin at the outstanding amount of the mortgage, and any buyer of an auctioned property will often have to take possession of the property in an "as is" state.
REO (Bank Owned Property)
If the auction fails to attract any bids, the property may be assumed by the bank and become an REO property. If this happens, the bank will list the REO property with a brokerage, like RealEstate.com, REALTORSÂ®, and attempt to sell the bank owned property as a normal real estate transaction. However, the bank may be willing to simple recoup the loss on the foreclosed loan.
How Can Buyers Benefit?
Buyers can obviously benefit from buying foreclosures at deep discounts off market value. Buyers may also look at foreclosed properties as investment opportunities. Buying a foreclosed property often means the buyer must be able to pay with cash and it is important that the buyer understand the local laws surrounding foreclosures and REOs.
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I will consult an accountant or an attorney for specifics and the most current law. This is a big deal and you should be careful with the decision you are making.