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J. Samuel Díaz             Follow East Palo Alto Today on
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Tuesday, March 12, 2013         
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Photo of foreclosed home
                    Photo courtesy photos-public-domain.com

As everyone knows, losing one’s home is a difficult adjustment, but there are things to do before, during and after losing a home that can make a big difference. If you lost your home via a foreclosure or short-sale or deed in-lieu and you then received a 1099-C form mailed to you from the bank that lent you the money for your lost mortgage, then you should read further.

This indicates the lender wrote off a portion or all of the money it failed to collect and is reporting it to the IRS for tax reasons. By law, the lender has to mail a copy of this 1099-C form to notify the borrowers that the bank has preferred to forgive the remainder of the money owed.

Under normal conditions, having a deficiency forgiven by the lender would require the borrowers to report it to the IRS as money earned.  And under normal conditions, the borrowers would then pay a tax to the IRS.

That is under normal conditions.  Understand that today’s situation is not normal.  The Mortgage Debt Relief Act of 2007 declared that no such tax would be applied to borrowers whose lenders forgave their home mortgages. The legislation was extended to include all home mortgage deficiencies that were written off by lenders from 2007 to 2012.

Of course, with any legislation, there are certain conditions to be met. Please make sure to talk with your tax accountant who prepares your IRS and FTB tax forms to make sure he or she is using the updated and correct IRS tax forms available at www.irs.gov.  In particular, IRS tax form 982 needs to be updated.

Do consult with your tax accountant or professional so that you
clearly understand how the Mortgage Debt Relief Act of 2007 applies to your situation and you can ensure that your tax preparer is preparing your tax forms correctly!

The alternative is to pay taxes that may not apply to your particular tax situation.  Last year, for instance, I discovered one of my former clients unwittingly owed around $12,000 to the IRS for the loss of his home to foreclosure. I met with him and reviewed the paperwork, including
form 1099-C and discovered the error.  His tax accountant was using an obsolete IRS 982 form!

Because of another error in his tax forms from years past and after getting his tax preparer to correct the errors and to use the updated forms, it turned out the IRS owed him money and gave him a tax credit of around $6,000. That is a difference of roughly $18,000! So this gentleman who duly paid his taxes every year discovered that investing the time to correct errors was well worth the effort!

Please take the time to review your tax papers and to look for a form 1099-C from your lender if you lost your home in 2011.  If the lender forgave the loan deficiency on your home mortgage in 2011, you should then expect to receive this form in January or February of 2012.

Sometimes lenders simply mail the form to the last known address, which may still show the address of the foreclosed property.  So make sure you go to the U.S. Post Office and request that your mail be forwarded to your new address.

If, for some reason, the 1099-C form did not arrive in time, you should be able to have your tax forms prepared again and resubmitted to the IRS and/or FTB.

Enough people have lost too much.  It is time to start planning and preparing for a better future for our families and especially for our children.

J. Samuel Díaz, the author of this article, can be contacted by email at epatoday@epatoday.org.