Tax Consequences Of Foreclosures

Tax Consequences Of Foreclosures

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The hot real estate market in the early part of this decade was fueled by easy to get, cheap money. Well, the inevitable backlash has occurred and foreclosures are skyrocketing. Most people don't realize a foreclosure can result in a big tax bill.

Taxes are undeniably complex and the IRS makes them moreso. It often does this by looking at things the opposite way any normal person would. For example, the agency views the waiver of a debt as a financial gain. An example will help.

Assume I own a house. I am carrying a $200,000 mortgage on the home. I run into problems making the payments and the home goes into foreclosure. I eventually am evicted and the bank takes back the home.

I have lost the house and my credit is a disaster. That being said, however, I am off the hook for the $200,000. Life could be worse, right? Well, it is about to get much worse.

The IRS is very interested in that $200,000 mortgage debt. Why? How could I possibly get into tax trouble since it is a debt? Well, the agency takes the view that the relief from that debt can actually be considered income to me.

This is why people hate taxes. By going through the foreclosure, I have more or less been wiped out financially. The IRS does not care. It considers the $400,000 mortgage I escaped as income and it wants me to pay taxes on it.

As foreclosures increase, more and more people are getting very surprising letters from the IRS. It isn't bad enough that you have lost your home, you now have a monstrous tax bill. This also applies to situations where a short sale is undertaken.

Do you have any options if you find yourself in this situation. The best step you can take is to get an appraisal on your house. The tax you owe is based on the difference between the appraised value and your mortgage debt.

With foreclosures climbing, the IRS is becoming more flexible in addressing this situation. People have successfully argued they should be relieved from the tax liability since they don't have a penny to spend.

Taxes are not generally dischargable in bankruptcy, but they can be in this case. If you can get no relief from the IRS, a bankrupcy court may terminate the underlying mortgage debt. Without any debt, there can be no gain or tax on it.

Suffering through a foreclosure is absolutely no fun to say the least. Adding a potentially large tax bill to the process is even worse. As more people face this problem, one has to hope the IRS will change direction.

About the Author:
Richard Chappoe is with BusinessTaxRecovery.com - providing professional tax debt relief today from those unpaid taxes that have been haunting you.



Article Originally Published On: http://www.articlesnatch.com


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