My Mortgage Was Discharged in Bankruptcy. Do I Need to Report It on My Taxes? – Mary

I bought a house in 1998. In 2000, I had a chapter 7 bankruptcy and the loan was discharged under section 524 of the bankruptcy code. The house foreclosed – sherrif sale in feb 2011

Do I need to report anything on my 2011 federal or state (michigan) tax returns regarding the foreclosure. I did not receive a form 1099-C or any information at all from Bank Of America.

Mary

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My Mortgage Was Discharged in Bankruptcy. Do I Need to Report It on My Taxes? Mary
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  • Msullivan

    Mary,

    My first piece of advice is that you must talk with a CPA or by definition and law, you have not gotten advice.

    However, it is likely that you do not owe federal taxes based on the foreclosure. To quote from http://www.IRS.gov:

    The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.I hope that helps.Good Luck!

  • Amy Kleinpeter

    You should always consult a tax professional — NOT any store with someone in a costume or similar stores, but a CPA.  However, one piece of tax advice I feel comfortable telling you is that debts discharged in bankruptcy are not taxable forgiveness of debt.

    Without bankruptcy, some settled debt is taxable and some is not (depends on if disputed when settled, language of settlement, and financial health of the debtor — see a CPA!) but if you file bankruptcy, the debts discharged are not taxable forgiveness of debt.

    Hope that is helpful and congratulations on getting what sounds like a rough year behind you moving forward!

    – Amy Clark Kleinpeter
    http://www.amykleinpeter.com

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