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Consequences Of Lower Foreclosure Taxes
Author David Schneider | Dec 27,2007
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When you have to foreclose on your home, you should be aware of potential tax problems. The tax implications can create a whole other mess. Be wary of “creative mortgages” available to buy your home or refinance, based on the increased value of your home when the real estate market was hot. You could be in trouble around tax time if you end up losing your property to the bank.
Complications leading to foreclosure are usually a combination of the loan terms, housing market in your area and federal tax laws. Mix them all together, and you have a real financial disaster.
Consequences of Lower Foreclosure Taxes When the Lender Forgives the Loan
Some problems come from the lender’s decision to forgive a portion of the loan. When this happens, the lender and borrower negotiate a reduced loan amount. The lender may also decide to foreclose on a property and sell it for less than the outstanding mortgage.
In both cases, the borrower is not responsible for the difference of the loan amount. It is usually considered a cancellation debt, or discharge of indebtedness income. This is all taxable income. It is calculated at the regular rate, which ranges anywhere from 10 percent to 35 percent, depending on your income.
The tax laws treat the foreclosure as a sale by the borrower, and the lender receives the proceeds. Financially struggling homeowners thinking of turning their keys over to the banks should definitely think twice. While it may relieve your monthly financial burden, it will not keep a tax bill out of your mailbox.
Most homeowners believe that once they leave the house payments behind, there is no further cause for worry. The tax repercussions of this mindset can be steep. For example, if you owe $50,000 on your home and they forgive $10,000, you will be the one to pay come tax time.
Foreclosure or Sale
Even though a foreclosure is not an actual sale in normal terms, it’s considered as such under tax code. If the sale of the house produces a gain, it’s a taxable gain. This means that even though you aren’t the one selling the property, the IRS views it as if you were. You might end up owing taxes on the sale.
The good news is that you can get out from at least some of the IRS tax bill, if you meet the homeownership tax-exclusion rules. This tax break allows a single homeowner to exclude up to $250,000 in profit from taxes. The exclusion amount is $500,000 for married couples who file jointly.
When you have to foreclose on your home, you should be aware of potential tax problems. The tax implications can create a whole other mess. Be wary of “creative mortgages” available to buy your home or refinance, based on the increased value of your home when the real estate market was hot. You could be in trouble around tax time if you end up losing your property to the bank.
Complications leading to foreclosure are usually a combination of the loan terms, housing market in your area and federal tax laws. Mix them all together, and you have a real financial disaster.
Consequences of Lower Foreclosure Taxes When the Lender Forgives the Loan
Some problems come from the lender’s decision to forgive a portion of the loan. When this happens, the lender and borrower negotiate a reduced loan amount. The lender may also decide to foreclose on a property and sell it for less than the outstanding mortgage.
In both cases, the borrower is not responsible for the difference of the loan amount. It is usually considered a cancellation debt, or discharge of indebtedness income. This is all taxable income. It is calculated at the regular rate, which ranges anywhere from 10 percent to 35 percent, depending on your income.
The tax laws treat the foreclosure as a sale by the borrower, and the lender receives the proceeds. Financially struggling homeowners thinking of turning their keys over to the banks should definitely think twice. While it may relieve your monthly financial burden, it will not keep a tax bill out of your mailbox.
Most homeowners believe that once they leave the house payments behind, there is no further cause for worry. The tax repercussions of this mindset can be steep. For example, if you owe $50,000 on your home and they forgive $10,000, you will be the one to pay come tax time.
Foreclosure or Sale
Even though a foreclosure is not an actual sale in normal terms, it’s considered as such under tax code. If the sale of the house produces a gain, it’s a taxable gain. This means that even though you aren’t the one selling the property, the IRS views it as if you were. You might end up owing taxes on the sale.
The good news is that you can get out from at least some of the IRS tax bill, if you meet the homeownership tax-exclusion rules. This tax break allows a single homeowner to exclude up to $250,000 in profit from taxes. The exclusion amount is $500,000 for married couples who file jointly. |
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