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Be Aware of the Tax Consequences of Foreclosure
Author David Schneider | Dec 31,2007
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Foreclosure can be a devastating experience for homeowners. Once removed from the home, the emotional and financial trauma may not end there. On top of the home loss, there may be tax consequences associated with foreclosure. Foreclosure does not excuse the homeowner from the taxes owed on the property. Even after a home has been lost, the homeowner is still responsible for any back taxes.
Foreclosure, Potential Tax Consequences and the IRS
According to the IRS, foreclosure is equivalent to the sale of a property. In the case of foreclosure, the property is sold to the mortgage lender. The IRS determines the property taxes, based on the fair market value of the home, not necessarily the amount of the mortgage.
Bankruptcy situations pose some exceptions to foreclosure tax consequences. During the foreclosure property auction, the accepted bid price becomes the fair market value of the property. However, the tax consequences may not stop there.
How to Be Aware of Potential Foreclosure Tax Consequences -- Types of Foreclosure
There are three main forms of foreclosure: voluntary, abandonment and foreclosure by the lender. The homeowner initiates the first two types of foreclosure, while the last is on the part of the lender.
In most cases, the type of foreclosure is of little concern to the IRS. The homeowner, who is personally liable for the mortgage debt, must pay taxes on the difference between the fair market value and outstanding mortgage amount. If the difference is positive in light of the homeowner, then the taxes resemble capital gain.
Although many people think that foreclosure is equivalent to a lift in financial responsibility, this may not be the case. Depending on the specific situation, foreclosure may have associated tax consequences that have the potential to present a further financial blow. A homeowner going through the foreclosure process should consult a tax advisor. It's necessary to assess the individual situation, including the tax consequences that may be associated with the foreclosure event.
Foreclosure can be a devastating experience for homeowners. Once removed from the home, the emotional and financial trauma may not end there. On top of the home loss, there may be tax consequences associated with foreclosure. Foreclosure does not excuse the homeowner from the taxes owed on the property. Even after a home has been lost, the homeowner is still responsible for any back taxes.
Foreclosure, Potential Tax Consequences and the IRS
According to the IRS, foreclosure is equivalent to the sale of a property. In the case of foreclosure, the property is sold to the mortgage lender. The IRS determines the property taxes, based on the fair market value of the home, not necessarily the amount of the mortgage.
Bankruptcy situations pose some exceptions to foreclosure tax consequences. During the foreclosure property auction, the accepted bid price becomes the fair market value of the property. However, the tax consequences may not stop there.
How to Be Aware of Potential Foreclosure Tax Consequences -- Types of Foreclosure
There are three main forms of foreclosure: voluntary, abandonment and foreclosure by the lender. The homeowner initiates the first two types of foreclosure, while the last is on the part of the lender.
In most cases, the type of foreclosure is of little concern to the IRS. The homeowner, who is personally liable for the mortgage debt, must pay taxes on the difference between the fair market value and outstanding mortgage amount. If the difference is positive in light of the homeowner, then the taxes resemble capital gain.
Although many people think that foreclosure is equivalent to a lift in financial responsibility, this may not be the case. Depending on the specific situation, foreclosure may have associated tax consequences that have the potential to present a further financial blow. A homeowner going through the foreclosure process should consult a tax advisor. It's necessary to assess the individual situation, including the tax consequences that may be associated with the foreclosure event. |
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