In every state, bank or lenders has the right to issue the IRS form 1099. This is the form where borrowers and former owners of Carmel CA homes are to report the Cancellation of Debt Income for every foreclosure or short sale. The idea is that the amount that was borrowed at the time the borrower took a mortgage will not be reported as an income. However, when any portion of the amount borrowed is forgiven because of a loan modification or a short sale, they will be converted from a loan into an income, thus needs to be reported to the IRS. Even though, it is the lenders’ right to issue a form 1099, there are still some who don’t, but most of them usually do.
In California, the bank may not issue a form 1099 in foreclosures involving refinance loan or equity loan which has resulted in cash out because the loan has not been forgiven. Thus, the bank still has the right to go after the borrowers for the amount they owe.
Under the Mortgage Debt Forgiveness Relief Act of 2007, for as long as loan modification, short sale of foreclosure occurs before the year 2012 ends, the IRS will not charge income tax on the debt forgiven especially if it is the primary residence of the borrower. However, if the act will not be extended, homeowners of Carmel Valley homes will lose their home because after 2012, it might be subjected to income taxation.
Many experienced real estate agents advise their clients that before they request for a short sale they must stop making payments because most lenders will not take requests seriously if they are in progress with their loans.
Consulting a tax professional before making a decision, whether to have a short sale or foreclosure, is advisable for owners of Carmel Valley homes to be fully aware on how these laws can affect them.
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