Foreclosures Lead to Tax Traps
by Richard Chappoe
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.
You might say it is sunny outside. The IRS, however, would say there is simply a lack of darkness. The same goes with debt. The IRS views the waiver of a debt as a form of income to a taxpayer. Stay with me on this one.
Okay, lets call it a given that I am a proud homeowner. I own a single family dwelling and owe $300,000 on the property. My hybrid loan starts adjusting and I go into default on the loan. The lender eventually gets a court order booting me out.
What a disaster. The home is gone and so is my equity in it. On top of that, my credit is now officially a disaster area, which effects my other credit obligations. Can you imagine a worse situation? Yes! The IRS is coming.
$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.
Night is day, day is night. This is how the IRS views the situation. The fact i don't have to pay back $300,000 doesn't mean I have any more money to my name, but the IRS doesn't care and, oh, it wants me to pay income tax on it.
The golden days of real estate are over and many people are paying for overdoing it. Foreclosure rates are way up and going to climb. This means the position of the IRS is going to be a huge burden on people.
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.
Going into foreclosure is bad enough from the straightforward perspective of losing your home. Throw in a large tax bill, and it is a real killer. Do your best to avoid this situation by selling that home or making arrangements to handle the debt.
Richard Chappoe is with BusinessTaxRecovery.com - providing expert tax debt relief today from those unpaid taxes that have been haunting you. Don't reprint this exact article. Instead, reprint a free unique content version of this same article.
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