State of California Franchise Tax Board

Foreclosure and Short Sales

I am quoting from an article from the California Franchise Tax Board about information to help the public to know about the laws that may effect their decision making when considering to let the Bank have your home or to Sell your Home in the Short Sale Process.

Quoting from this article it states questions that all of us want to know.

Will I owe tax on a deficiency?

If there is a foreclosure or a short sale a taxpayer will receive either a federal Form 1099 A, Acquisition or Abandonment of Secured Property, or a tax for 1099 C, A cancellation of Debt that provides the amount of debt cancelled, information to compute gain or loss, and whether the tax payer is personally liable for the debt. The most common situations on a foreclosure or short sale does not result in cancellation of a debt, income involve a non- recourse loan. On a non-recourse loan means the lender's remedy in the case of default is to repossess the property.

Forgiveness of a non-recourse loan does not result in Cancellation of Debt income, it may result in other tax consequences, like a reportable gain from the disposition. Even if the debt discharged is non-recourse, a taxpayer may have a gain to the extent of the balance of the mortgage forgiven if it exceeds their adjusted basis of the property.

If the gain, if any, from the foreclosure or short sale may or may not be taxable, depending on whether the IRC section 121 applies and the amount of the gain. Irs section 121 only applies to principle residences, and limits the amount of gain that can be excluded from the income


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