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Real estate foreclosures are a current menace to many home owners, while a golden opportunity to others. Fortified with the knowledge that comes from experts, you have a much better opportunity to solve your problems and get on top of this phenomenon. It is therefore the aim of these pages to let you read what others have to say on this topic and learn from the many ideas they represent. You will agree: it is time well spent and won't cost you a cent! Other articles: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Foreclosures Lead to Tax Traps by Richard Chappoe As we all know by watching the news, the real estate market is pulling back hard from the days of glory earlier this decade. In fact, many people are losing their homes to foreclosure. Few realize the tax consequences of losing one's home. 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 Assume I own a house. I am carrying a $200,000 mortgage on the home. I run into problems making the payments and the home goes into foreclosure. I eventually am evicted and the bank takes back the home. No credit. No home. No loans. No equity. Having your home foreclosed on is pretty much a total financial disaster and there is no getting around that fact. At least the worse is over, right? Nope. Now the IRS is taking an interest in you. The IRS is very interested in that $200,000 mortgage debt. Why? How could I possibly get into tax trouble since it is a debt? Well, the agency takes the view that the relief from that debt can actually be considered income to me. 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! 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. 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. Suffering through a foreclosure is absolutely no fun to say the least. Adding a potentially large tax bill to the process is even worse. As more people face this problem, one has to hope the IRS will change direction. Richard Chappoe is with BusinessTaxRecovery.com - providing expert tax debt relief today from those back taxes that have been following you. |