Tax Consequences of Foreclosures
Tax Consequences of Foreclosures
Tax Consequences of Foreclosures
Okay, the disclaimer first: I am a real estate agent, not an attorney or CPA and the information in this article is not exhaustive by any stretch of the imagination. None of it replaces the counsel of a real estate attorney, CPA or other such professionals. Please always consult the appropriate professionals.
Foreclosures represent opportunities for buyers and potential headaches for sellers, especially when concerning taxes. The IRS as well as the state and even the county and city in which the property is located want their share. That applies to all property sales and foreclosures are sales.
What you might ask is being taxed in a situation where there is more money owed than the property is worth?
Know that even when the home is sold at a loss, you may be subject to taxes.
Rules for Foreclosures
"The IRS has tax rules for foreclosures or repossessions by lenders of homes of owners who have fallen behind on their mortgage payments. There can be severe and unexpected tax consequences for an owner who simply walks away because he or she has little or no equity and the lender takes over and sells the placeIn that situation, cancellation or forgiveness by the lender of the debt usually means the debtor has reportable income, though there are some exceptions -- for instance, insolvency," says attorney Julian Block, a New York Times leading tax professional.
Note: Insolvency is a legal terms that must meet specific requirements, rather than what most people would think of as being insolvent. Here the term refers to a rigorous process that involves competent legal counsel.
The Federal Government, aware of the impending and on-going U.S. housing crisis, passed The Mortgage Debt Relief Act of 2007, which generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
The Mortgage Debt Relief Act of 2007 applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
For more information and answers to commonly asked questions regarding this piece of legislation, please visit the IRS website and type in mortgage debt relief act.'
Canceled Debt Taxes
If a homeowner is able to work out a deal where the bank writes off the remainder of the loan, the Internal Revenue Service (IRS) mandates that the owner is liable for all taxes owed on the loan difference that is forgiven. The forgiven portion of the loan is considered taxable income, or in more technical terms, cancellation of debt (COD) income required to be reported on taxes.
The subject of taxes and foreclosures has many facets. Should you wish to educate yourself further, you may wish to check out Roni Lynn Deutsch's book Surviving the Coming Tax Disaster: Why Taxes Are Going Up, How the IRS Will Be Getting More Aggressive, and What You Can Do to Preserve Your Assets, published in 2010.
Get legal and tax assistance from the appropriate professionals.
Data provided here is deemed to be accurate and NOT guaranteed to be so. All Views Published Here are Expressly Those of Gabrielle Dahms.
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