Tax Consequences of Foreclosures

Millions were made in the real estate market earlier this decade. Now, millions are being lost. The availability of easy money in the form of mortgages is reaping a bevy of foreclosures and their are major tax consequences to foreclosures.

The Internal Revenue Service looks at things in a strange manner. What you may see as a loss, it sees as a gain. The agency takes the view that any loss that relieves you of a financial obligation is actually a gain. Let's look at an example.

Let's say I hypothetically purchased a home three years ago. I have a balloon loan on which I owe $400,000. Rates rise and I can't make the payments. Foreclosure proceeds get underway and I am eventually given the boot.

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.

$300,000 is a lot of money. Not being required to pay the mortgage is a financial relief to say the least. The IRS agrees. Unfortunately, the agency views this relief as a form of income. Yes, even though I don't have a penny of it in my pocket.

Try to wrap your mind around that one. It can take a few efforts. Yes, the IRS views the foreclosure as though I have received a $200,000 salary for the year. You can guess what comes next. The agency wants me to pay taxes on it!

Watch the news for five minutes and you know what is going on in real estate. Values are down, interest rates are up and so are foreclosures. Thousands of peopel are running into this tax situation, even if they short sale their properties.

So, is there anything you can do? Yes. The key is to get an appraisal of the home before you are foreclosed on. This is important as you are taxed on the difference between the value of the home and what you owe.

In addition to the appraisal, you can make different arguments to the IRS. There are various approaches, but the basic idea is to suggest you received no gain and are insolvent. The IRS can then waive the tax liability.

As a final resort, you can look to the courts for protection. In this case, we are talking bankrupcty. The court can dismiss the underlying mortgage debt, which serves to terminate the tax due.

Only in America could we be talking about the financial disaster of going through a foreclosure and still have to consider taxes. It is ridiculous. Let's hope public pressure comes to bear and this policy is terminated.

Article Source: http://www.phalenes.org/articles

Richard Chappoe is with BusinessTaxRecovery.com - providing expert tax debt relief today from those unpaid taxes that have been haunting you.

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