Foreclosures and Taxes Consquences
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.
If a bank takes your home or forecloses on it, you are responsible for the difference of what you owe and what the bank had to sell for it. So if you owed 50K on it and the bank had to sell it for 20K you will have a taxable difference of 30K, so homeowners really need to be careful about this.
The Internal Revenue Service considers any loan amount forgiven as cancellation of debt and is taxable as regular income. The Internal Revenue Service says that debt discharge or cancellation is fully taxable as regular income. Homeowners really need to be aware of this before they consider foreclosure.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
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.
Homeowners should discuss the tax consequences before turning their keys back into the bank or giving their house away for less than what is owed on it via the bank.
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.
If a bank takes your home or forecloses on it, you are responsible for the difference of what you owe and what the bank had to sell for it. So if you owed 50K on it and the bank had to sell it for 20K you will have a taxable difference of 30K, so homeowners really need to be careful about this.
The Internal Revenue Service considers any loan amount forgiven as cancellation of debt and is taxable as regular income. The Internal Revenue Service says that debt discharge or cancellation is fully taxable as regular income. Homeowners really need to be aware of this before they consider foreclosure.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
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.
Homeowners should discuss the tax consequences before turning their keys back into the bank or giving their house away for less than what is owed on it via the bank.
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7:28 AM
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