Tax Consequences of Foreclosure
If you think that you can escape the IRS when you decide to foreclose on your house, think again, there can be huge tax disadvantages to letting your house go back to the bank, it can mean thousands of dollars you could owe to uncle Sam.
Many homeowners bought their house under creative financing terms such as interest only and variable rate loans. With the recent shakedown of the mortgage industry and rates adjusting, it can be a recipe for disaster for homeowners. You can owe the IRS in one of two ways, which we will discuss in detail.
The difference between what you owe on your mortgage and what the bank has to sell it for is called a short sale. Short sales are becoming widespread as many people are losing their homes to foreclosure. The difference in the two numbers is usually taxable.
The other way in which you will owe taxes is when the bank forgives part of the balance, this is taxable as well. In the eyes of the Internal Revenue Service, this is COD or cancellation of debt income or discharge of debt income, as it is often called.
Tax rates can be from 10 to 35%, but it depends on the tax bracket of the indebted homeowner. It can vary greatly but tax law mandates that the owner actually sell back the house with the proceeds going back to the bank to cover their debt.
Any of the debt owed beyond what was paid is cancellation of debt income, which is always taxable. Many homeowners, after some advice of a loved one or someone they trust, wrongly think they will not have to pay the IRS for their discharged debt, which is not the case.
Owners of homes should always consider the tax consequences before they give thier home back to the bank, it is never as easy as it seems, and by giving their keys back to the bank, they could end up having a huge tax bill at the end of the year.
Many homeowners bought their house under creative financing terms such as interest only and variable rate loans. With the recent shakedown of the mortgage industry and rates adjusting, it can be a recipe for disaster for homeowners. You can owe the IRS in one of two ways, which we will discuss in detail.
The difference between what you owe on your mortgage and what the bank has to sell it for is called a short sale. Short sales are becoming widespread as many people are losing their homes to foreclosure. The difference in the two numbers is usually taxable.
The other way in which you will owe taxes is when the bank forgives part of the balance, this is taxable as well. In the eyes of the Internal Revenue Service, this is COD or cancellation of debt income or discharge of debt income, as it is often called.
Tax rates can be from 10 to 35%, but it depends on the tax bracket of the indebted homeowner. It can vary greatly but tax law mandates that the owner actually sell back the house with the proceeds going back to the bank to cover their debt.
Any of the debt owed beyond what was paid is cancellation of debt income, which is always taxable. Many homeowners, after some advice of a loved one or someone they trust, wrongly think they will not have to pay the IRS for their discharged debt, which is not the case.
Owners of homes should always consider the tax consequences before they give thier home back to the bank, it is never as easy as it seems, and by giving their keys back to the bank, they could end up having a huge tax bill at the end of the year.
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7:14 AM
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