Hello everyone, I hope someone here may be able to help me out or point me in the right direction. In June of 2010, we had to close our business and unfortunately file for bankrupcty (we lived in NY at the time). Our mortgage, which at the time was with BoA, was included in the list of creditors. The payoff balance was approx $245k. In talking with our bankrupcty attorney, he said if we sold the house (it was valued at approx $300k), that we should fall within the range for the homestead exemption allowing us to keep the proceeds. So the house was listed in July of 2010. At that time, we moved from New York to Virginia, as we accepted positions there so it required a move out of state.
We had the meeting of creditors, and then ultimately the bankruptcy was discharged in March of 2011. The house had not sold to that point, it was still on the market with us reducing the price trying to get it to move. During the process, our attorney was pretty much non existent once the discharge happened, because we needed to know what happens with the house, since BoA was listed as a creditor. However, many calls and e-mails to him were not returned. So the house stayed on the market, we had not made any payments on the house since June of 2010, and BoA had not acknowledged any discharge or foreclosure activities. In July of 2011, we finally got an offer but it would result in a short sale.
We agreed and started the process, and last week we were finally told that it had been approved. But now we have questions that neither our real estate attorney, nor the IRS seem to be able to answer definitively for me. In the approval letter, BoA says that the difference between the prinicpal owed and the amound agreed upon (approx $8k) would be on a 1099C, and reported as taxable income. Well obviously, being taxed on that is while understandable from a legal standpoint after understanding it, is not something we can afford. However, research showed me that the IRS passed the Mortgage Forgiveness Relief Act which could allow this to be exempt for a few different reasons. The first reason would be primary residence, but unfortunately it was not. Another exemption that would qualify is bankruptcy, which is obviously something we did have to go through and as mentioned before, BoA was listed.
I spoke with the IRS, and what I got from that was that if it was either non-recourse, or discharged in Bankruptcy that they would not look at it at all, which is what we want. But if I understand right also, NY is a one action state.
So, after all of that...my question is, does anyone have experience in this type of situation which would hopefully tell me that yet, the amount that BoA forgives is exempt and will not be considered taxable income? Then in my talkes with NYS, they said they would classify and deal with it exactly as the IRS would.
I hope any and all of that made sense, if not I will gladly try and clarify if it will help.