Question:
Once the mortgage company has issued a 1099 to the (former) homeowner, is it too late to discharge the deficiency and avoid the income tax liability on the deficiency? I thought there was an IRS regulation that prevented the mortgage company from burdening homestead homeowners with a 1099 when the homestead was lost to foreclosure. Am I remembering correctly?
Answer:
My understanding is that when the taxable event occurs prior to filing the BK, the debtor is still responsible for the tax liability. However, if the 1099 was filed on a homestead property (as homestead is defined by the IRS, which I believe requires living in the property 2 or 3 out of the past 5 years), the debtor will not have tax liability on the 1099 if the proper paperwork is filed when doing their taxes. See the following IRS article on the Mortgage Forgiveness Debt Relief Act:
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
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