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Ask Dave

1099 Forms and Foreclosure

What 1099 forms does Jason need to be concerned about in the event of foreclosure?

QUESTION: Jason on Twitter wants to know what loans are claimed on a 1099 after a foreclosure. Dave reviews different loans and how each is taxed.

Dave's ANSWER: A 1099 is for income, and it is issued for debt forgiveness. For instance, if you owe $10,000 on a credit card and you settle it for $2,000, the $8,000 that they forgave, they will issue a 1099 for and you have to claim that $8,000 as income. It is taxable.

That is not true on your personal residence. You do not get a 1099 for that, and if you do, you don't owe any money on it unless you have refinanced and borrowed more on the house than you originally used to buy the house. So you bought the house for $200,000 many years ago and it went up to $800,000 in value and you refinanced it for $250,000.

That extra $50,000 above what you originally borrowed to buy it might be subject to a 1099 if they had to forgive it. In other words, if you refinanced the thing up to the hilt and then lost it much higher than you originally paid for it, then you might have it. Almost no foreclosures have a 1099 or have taxes due.

As far as a deficiency, that means after they foreclose, if the house does not bring what was owed on it, they come after you for the difference, or deficiency. And FHA does not do that, if it's a Department of Housing and Urban Development, or HUD, mortgage. The VA, or Veterans Administration, will chase you to the ends of the earth. They are the most aggressive of everyone as far as chasing on deficits.

To me, that's kind of ironic, because the Veterans Administration is there to serve the veterans, but they are really aggressive about it.

As far as a conventional mortgage, such as Fannie Mae or Freddie Mac, a traditional mortgage, they have a right to chase you for the deficit, and most often they do if they think they can get anything and if they think it's a small enough bank that they won't be overwhelmed. Some of the large banks have become so overwhelmed with their foreclosures they have not gotten around to chasing anybody. It just sits and sits. They have the right to, but oftentimes don't.

Thank you! Your guide is on its way!

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