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Do I owe the government $50,000???

This is a deadly serious question!!! I recently had a house that went into Foreclosure last year. Just last month I received a 1099 in the mail saying that I had abandoned the house (which I never lived in and bought at non-owner occupied) and the form said that what I owed was $447,000 and the value of my house is only $400,000. I know I have to show this to my tax preparer when I go to do my taxes and I'm so scared because I need to know if I'm going to have to pay the difference to the IRS??? HELP ME!!!!!

Public Comments

1. You probably owe taxes on the difference between the two amounts ($47,000). When they write off the amount that you didn't pay, it is as though you received that money. Think about it, in a way you did -- it's money you didn't have to pay, but should have. You may definitely owe some money, but your tax guy should know more of those details.
2. The new law for this situation went into effect mid December. If you owe the lender 447,000 how much of it was acquisition debt? How much of it is equity loans? You take the 447 and deduct the acquistion debt. If this is not your original home loan and it is a refinace then you are in trouble. When you have debt forgiveness it is taxable. Feel free to email me.
3. You received the 1099-A, the first shoe to drop. Apparently it says Yes in line 5 which means you "sold" the property for $400,000 (form 4797 if was rental; schedule D if it wasn't). The POTENTIAL $47,000 or cancelled debt hasn't actually happened yet--that's when the bank sends you a second form, 1099-C. In some scenarios the cancelled debt income is cancelled out by the loss, but if this was investment property (not a rental), you can end up with $3000 a year as a loss with a huge carryover to next year's schedule D and $47K of income that you must pay the tax on in 2008 (at this point I think you'll get the 1099-C *next* year). Since this is rental property, the standard rules apply (the mortgage relief act DOES NOT apply). If you are in bankruptcy, proceed directly to form 982. If you are not in bakruptcy, you must show that you are insolvent before you can use form 982 to exclude the income. Insolvency means that if you were to liquidate everything you own (including retirement plans, other property, furniture, cars, jewelry, clothing, etc), you still couldn't pay off everyone you owed. If you are insolvent, you proceed to form 982. Form 982 doesn't make the debt go away. it requires you to reduce tax "attributes"--including schedule D carryovers from previous years--and if you are out of such things, to then reduce the adjusted basis of assets you kept.