I Received a 1099 from My Lender, Now What? Tax Consequences of Foreclosure or Short Sale of Personal Residence in Arizona


It is difficult to read any economic news or watch a local TV news program without seeing the prevalence of foreclosures and short sales of personal residences in Arizona. It is not uncommon in today's economic crisis to own a home that was purchased in the last five years that is substantially "upside down". Many neighborhoods have more than one of these properties, driving down the value of other houses in the neighborhood. Some people have given up and don't want to keep paying mortgage payments on houses on which their mortgage is double what the house may be worth. Others simply cannot keep making the payments due to an interest rate reset, hardship, or job loss. The step to attempt a short sale or allow the bank to complete a foreclosure sale is difficult. Either one may result in tax consequences to the homeowner.

What is the Difference Between a Short Sale and a Foreclosure?

A short sale is when a homeowner has certain financial or personal hardships and enters an agreement with the lender to sell their house for less than the amount of the outstanding mortgage on the home. The balance of the obligation is forgiven by the lender when the property is sold. The difference between a short sale and a foreclosure is that in a short sale, the residence does not go through a formal sale that is controlled by Arizona statutes, commonly called either a foreclosure or a "Trustee's Sale".

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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