What most people fail to understand is that if you have been foreclosed on in 2010, you may receive a 1099 for your taxes in 2011. Financial institutions that file a foreclosure action against you during 2010 have the option to file a 1099C and report to the IRS.
So What does a 1099 do?A 1099 is a report of taxable income. So on top of your wages that were earned in 2010 you will receive a 1099 as additional "income".
Where does this "income" come from? This comes from the deficiency judgment filed against you on your foreclosed property. For example, let's say a financial institution auctions your home for a price of 200k, but you borrowed 300k to purchase it. The 100k difference is reported as taxable income to the IRS. The IRS then taxes you on this "income". You can also receive this from a short sale property unless otherwise agreed by you and the financial institution.
What are the dangers? You may have to make a payment arrangement with the IRS to pay them from this taxable income. Once this is reported to the IRS it is difficult to get this amount waived.
What are my options?You may qualify for a tax exemption which is allowed by law. If you do not qualify for this exemption you may want to contemplate bankruptcy. By using Bankruptcy you may be able to waive all of the deficiency. You should file bankruptcy PRIOR to the end of 2010 to avoid tax liability.
At the Alvarez Law Firm we want you to understand the law and your rights. We ALWAYS offer free half hour bankruptcy consultations.
Rachel M. Alvarez, Esq.
The Alvarez Law Firm A Professional Association