Will I be responsible for the capital gains tax on foreclosed property? 9 Answers as of March 07, 2014

I own a Tenant in Common Property (one in Texas and one in Tennessee) which are in danger of being foreclosed on by the bank that originally financed them. I have been told that if the bank forecloses, I will be responsible for the capital gains tax on my portion of the remaining balance of the mortgage. So not only will I not get back my original investment but I will also be paying tax on money I never received?

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Meister & McCracken Law Firm, PLLC | Joanne M. McCracken
Yes, you will and you will receive a 1099 miscellaneous income form from the lender. There are options available to youyou should consult your accountant about the tax related options. Also, if you discharge the debt in bankruptcy, there are no tax consequences for you. Talk to a qualified bankruptcy attorney about the bankruptcy related options.
Answer Applies to: Arkansas
Replied: 3/7/2014
KEELSLAW | WOODY KEELS
That part of a mortgage for which you are responsible and which has been forgiven is income to you.
Answer Applies to: South Carolina
Replied: 3/7/2014
The Law Office of Darren Aronow, PC
The Law Office of Darren Aronow, PC | Darren Aronow
I think that is a question for your accountant not for attorneys.
Answer Applies to: New York
Replied: 3/7/2014
Coulter's Law
Coulter's Law | Coulter K. Richardson
No. In order to be liable for capital gains tax, you must have a capital gain. If there is a remaining balance after the foreclosure and sheriff's sale, you might be on the hook for a deficiency judgment, but not capital gains tax.
Answer Applies to: New Jersey
Replied: 3/6/2014
Stephens Gourley & Bywater | David A. Stephens
I do not know about capital gains taxes, but you may have to recognize the amount the bank lost from the foreclosure as income on your return. The tax theory is that you got the loan and therefore you did get the money.
Answer Applies to: Nevada
Replied: 3/6/2014
    Durham Jones & Pinegar | Erven Nelson
    What you were probably told is that if the banks forgive the debt, you will owe tax on the amount forgiven. In most cases, debt forgiveness constitutes taxable income. But, you can sometimes offset it with losses. I suggest that you talk to a good accountant.
    Answer Applies to: Nevada
    Replied: 3/6/2014
    Law Office of Jeffrey T. Reed | Jeffrey T. Reed
    You really need to talk to an accountant about your particular situation. The capital gains issue is based on whether or not you had a gain. There are at least two other issues you need to consider; if there is imputed income if the bank writes off a portion of the loan you will owe some income tax and whether or not your loans were recourse or non-recourse loans. I am not familiar with Texas or Tennessee, you should check both jurisdictions to see how foreclosures are handled and if there is an exemption you can use to avoid these taxes.
    Answer Applies to: California
    Replied: 3/6/2014
    Irsfeld, Irsfeld & Younger LLP | Norman H. Green
    The short answer probably is yes. But you will not have to pay tax on money you did not receive, except to the extent that you have previously deducted money that you did not spend.
    Answer Applies to: California
    Replied: 3/6/2014
    Law Office of Shawn N. Wright | Shawn N. Wright
    The more common tax problem that results after a foreclosure is related to what's known as "cancellation of debt". This isn't related to capital gains, but rather the underlying debt. Essentially, the Internal Revenue Service authorizes banks to issue 1099-C tax forms to borrowers in the event that there has been a default and loss to the bank. So, for example, let's say that your loan balance was for $200,000, and there's a foreclosure. Let's say that after the foreclosure, the bank sells the property for $140,000, then you would be issued a 1099-C tax form for the $60,000 difference. There are two ways to get out from actually having to pay income tax on this cancelled debt. First, you could claim an insolvency exemption, or alternatively, you could file a bankruptcy case to discharge the mortgage debt. You should perhaps speak with a bankruptcy attorney in your state to see if bankruptcy could benefit you. The other problem of course, is that the mortgage bank could sue you for the mortgage loan deficiencies, depending on your state's laws. So, contact a competent bankruptcy attorney and learn more about your rights.
    Answer Applies to: Pennsylvania
    Replied: 3/6/2014
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