Taxes on Mortgage Foreclosures

Depending on how much a borrower owes on his mortgage loan and the current home values in his area, his mortgage lender may be unable to recoup the full mortgage debt from the sale of the property. The borrower still owes any part of the original mortgage loan not reimbursed via the property sale. This is known as a”mortgage deficiency.”


If permitted in the borrower’s state of residence, a lender may sue her for the mortgage deficiency. Some states, such as California, prohibit lawsuits against customers for outstanding mortgage deficiencies. In situations like these, or where the mortgage company determines that the borrower does not have the assets to repay the rest of the loan, the lender will normally write the debt off as a tax loss.


The IRS allows companies to write off noncollectable debts because a bad debt deduction deduction. The business should then send the debtor a Form 1099 informing him of its own action. The debtor, then, must pay taxes on the full sum payable by the business. Until 2007, this procedure employed to mortgage deficiencies. The Mortgage Forgiveness Debt Relief Act, however, relieves many former homeowners of any tax obligations that may come from forgiven mortgage debt.

Time Frame

The Mortgage Forgiveness Debt Relief Act proceeds through December of 2012. In this time period, homeowners who lose their homes to foreclosure will not be held responsible for paying taxes mortgage deficiencies. Following December of 2012, Congress may select either to expand the taxation defense offered by the Mortgage Forgiveness Debt Relief Act or do nothing and allow it to perish. Should this occur, customers must once again comprise forgiven mortgage loans within their own taxable income.


Tax protection after foreclosure doesn’t apply to each employer. Folks must nevertheless pay taxes on forgiven mortgage debts that exceed $1 million. Married couples filing jointly, but qualify for around $2 million in taxation protection. Additionally, a foreclosed home must have been a person’s primary residence for the IRS to forgive any resulting tax duty.


Lenders expanding mortgage loans to customers living in nonrecourse countries do not have the choice to write off a mortgage deficit as a tax loss if there is no legal provision for them to pursue a mortgage deficiency. Mortgage deficiency loopholes, but do exist. In California, as an example, a lender may bypass the nonrecourse law by seeking a judicial foreclosure. Judicial foreclosure takes place throughout the court and takes much longer than a nonjudicial foreclosure, but provides the lender the right to pursue a mortgage deficiency. If the lender can’t collect the deficiency, it may claim the debt as a tax deduction.

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