Even if you get a deficiency waiver from your lender, that doesn’t mean you’re free and clear. When your lender grants you a deficiency waiver, they report that to the IRS, who counts it as income paid to you. So, you may end up owing taxes on the amount of the deficiency waiver.
In general, there are three ways to avoid tax liability from a deficiency waiver:
- The Mortgage Forgiveness Debt Relief Act of 2007 lets you exclude income from a deficiency waiver if it is from your primary residence. However, this only applies to deficiency waiver income from the years 2007 through 2014.
- If your liabilities outweigh your assets, the IRS will consider you insolvent and therefore not responsible for taxes on a deficiency waiver.
- Filing for Chapter 7 bankruptcy will get all of your debts forgiven, and debts forgiven through Chapter 7 are not taxable.
If you’re a homeowner who’s found yourself in a foreclosure situation, you need the advice and representation of a knowledgeable foreclosure law firm.
Cal West Law has been helping Southern California homeowners just like you for over 25 years. Call us today at (818) 446-1334 for a free consultation.