Legal Question in Credit and Debt Law in Massachusetts
can second mortgage company put your amount you owe them as income paid to you on your yearly tax income
2 Answers from Attorneys
You've asked if a second mortgage company can put the amount you owe it as income paid to you on your yearly tax income.
Yes if the debt is cancelled, which usually follows a foreclosure by the first mortgage lender. The C in the 1099-C means cancellation. Please keep reading; its important.
Cancellation of debt is debt forgiveness. Debt forgiveness is income in the IRS world, so the 1099-C must be issued. Cancellation means that you won't be sued for this debt. Please keep reading.
Debt forgiveness income is not taxable by using IRS FORM 982 if (1) the property was your primary residence and the mortgage debts exceeded the property's fair market value, (2) you are insolvent, including retirement funds, or (3) you filed bankruptcy.
I agree with my brother counsel that, in very general terms, when a debt is forgiven, the IRS considers that to be income attributable to you. Example, if you were to receive $60,000 but only pay back $40,000, you have experienced a gain of $20,000. If you think you have a unique real estate circumstance and no taxes are owed, speak to your tax preparation professional.