What is Acquisition or Abandonment of secured property?

[RRD]

I got a letter in the mail from ASC (our old mortgage company that we included in our chapter 7 BK) and it states what our loan was and the fair market price of our foreclosed house. Then on the form it reads:

This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or sanction may be imposed on you if taxable income results from this transaction and the IRS determines that it has not been reported....

What does that mean? We included it in our Ch 7 BK and I remember our attorney mentioning something about the house and because we are CH 7 there were no tax penalties because we were insolvent. We did file a return that the trustee took so I'm not sure how we were negligent?

[DebtEnder]

Don't worry about it the whole "a negligence penalty or sanction may be imposed on you if taxable income results from this transaction and the IRS determines that it has not been reported.. blah blah " is what is put on almost every income document I've ever seen.

From the Irs site regarding bankruptcy and tax found here http://www.irs.gov/publications/p908/ar02.html#d0e1063

the relevant excerpt I'm pasting can be found under exclusions.

Debt Cancellation (what the mortgage company in effect was forced to do under bankruptcy is defined here)

If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes. A debt includes any indebtedness for which the debtor is liable or which attaches to property the debtor holds.

Exclusions (why you can ignore the 1099 )

Do not include a canceled debt in gross income if any of the following situations apply:

*

The cancellation takes place in a bankruptcy case under the U.S. Bankruptcy Code.

Only time a 1099 would matter after bankruptcy would be if a a chapter 11 case was done

[JoeBankrupt33]

You can also realize a capital gain when a house forecloses. When you go through the bankruptcy, you absolve yourself from any cancelled debt, but you still have to report any taxable gain on the sale of your home to the IRS. Most people, especially those who gave up their homes in bankruptcy, do not have any taxable gain. After all, if our homes were going up in value, then a lot of us wouldn't be here.

To the IRS, it's just like you sold your home. But, if you sell (or foreclose) on your home, and you've lived in the home for 2 of the last 5 years, and you haven't excluded the gain on a previous home in the last 2 years, then you are exempt from paying taxes on $250,000 worth of gain ($500k for couples).

So, you ask, how do I have a gain on a foreclosure? Well, most people don't. In most cases, your gain is the sales price (outstanding principal balance) minus what you paid for the home minus any improvements you've made.

I'm sure that you have nothing to worry about.

[RRD]

Thank you both for your replies. We didn't claim anything about the foreclosure on our taxes - we got this 1099 about 2 weeks after we filed and when we said we had a foreclosure (we filed our own taxes), it didn't ask anything about the auction amount. We bought the house for 150,000 and it was worth 90,500 when we left the home and it auctioned for 96,700. It was zero down and we didn't gain anything from it. Thanks again!