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Discussion Starter #1
Good day all,
A few years a go we filed for bankruptcy since we were no longer able to meet our financial obligations due to an investment property that we had which went south. We filed a Chapter 13 and the debt was forgiven as part of the bankruptcy filing. A few years later we are now faced with the daunting thought of tax implications from the forgiveness as the Mortgage Debt Forgiveness only applies to primary residence. Has anyone had any experience with this and if so what has been your ultimate outcome? At the time of filing we owed roughly 450K on two mortgages (on with Homeland Financial and the smaller with Wells Fargo). Needless to say I am nervous. We have worked so hard to get back on track with extra jobs and OT whenever we can get it only to find out we may get hit with a huge tax bill.
 

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There are some exclusions to the forgiveness of debt to be taxable. If the debt was forgiven due to insolvency or bankruptcy, it will be excluded from taxable income. If it was forgiven because of the Mortgage Forgiveness Act (or whatever it's officially called) it is also excluded. These exclusions are for FEDERAL taxes only. You'll have to check your state tax laws.
 

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There are some exclusions to the forgiveness of debt to be taxable. If the debt was forgiven due to insolvency or bankruptcy, it will be excluded from taxable income. If it was forgiven because of the Mortgage Forgiveness Act (or whatever it's officially called) it is also excluded. These exclusions are for FEDERAL taxes only. You'll have to check your state tax laws.
Yes this.

Also though, I am confused because when I had a mortgage debt forgiven on a settlement on a second mortgage, I had to deal with the tax portion the tax year that the debt was forgiven. If you had the debt forgiven a few years ago, why are you only now dealing with the tax implications? Our debt was forgiven in August of 2012, when I filed 2012 taxes in spring of 2013, that was when I had to prove the insolvency. Or does it have to do with the bankruptcy discharge time? I don't know much about bankruptcy so I don't know if that's what it is about.
 

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Discussion Starter #4
HappySmileyLady,
We actually filed for bankruptcy in 2009 (chap13) and just received notice from the bankruptcy court that the discharge has been completed. The property has not been foreclosed on as of yet, however since they are now free to proceed with foreclosure, I am expecting that, should they foreclose on the property during this calendar year, we will be incurring the tax liability-implications when we file in April. As I understand it the bank is not able to foreclosure on the property while the bankruptcy is still active.
Thanks for taking the time to reply.


Yes this.

Also though, I am confused because when I had a mortgage debt forgiven on a settlement on a second mortgage, I had to deal with the tax portion the tax year that the debt was forgiven. If you had the debt forgiven a few years ago, why are you only now dealing with the tax implications? Our debt was forgiven in August of 2012, when I filed 2012 taxes in spring of 2013, that was when I had to prove the insolvency. Or does it have to do with the bankruptcy discharge time? I don't know much about bankruptcy so I don't know if that's what it is about.
 

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There are some exclusions to the forgiveness of debt to be taxable. If the debt was forgiven due to insolvency or bankruptcy, it will be excluded from taxable income. If it was forgiven because of the Mortgage Forgiveness Act (or whatever it's officially called) it is also excluded. These exclusions are for FEDERAL taxes only. You'll have to check your state tax laws.
Just for your peace of mind, I would check with your bankruptcy attorney and/or a CPA to be sure of where you stand. I know that we provided proof of bankruptcy to the IRS for clients and that took care of their problem.
 

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My advice is to wait for the paperwork to come in. If you get the Debt Forgiveness notice, first make sure the figures are correct.

IF you get the debt forgiveness form, calculate your taxes with that information. If you end up owing a lot, apply for a tax negotiation. At the worst, you'll end up paying the tax on a payment plan. It isn't the end of the world.
 

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the discharge has been completed. The property has not been foreclosed on as of yet, however since they are now free to proceed with foreclosure, I am expecting that, should they foreclose on the property during this calendar year, we will be incurring the tax liability-implications when we file in April.
The completion of the foreclosure proceedings determines the size of the forgiven portion. Eg, if the property sells for $400,000,the Bank's loss is $50,000 (plus expenses, they have had to administer the loan, do the sales,etc). But your default may have cost your lender only $50k or $100k, not the whole $450k. (You'll get a Form 1099).
 
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