The IRS and Foreclosures
If you think that the bank taking your house back gives you a free ride, think again. You did not escape the money you owed, guess what, it is now taxable by the federal government, otherwise known as the Internal Revenue Service. You still owe some money, so be careful.
There are many different ways you can owe the Internal Revenue Service when you foreclose on your house, we will only discuss a couple of the ways here. There were many people who bought their home under creative financing deals that the bank offered. When these loans adjusted, such as with the variable rate loans, it created disaster for the home owners.
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 debt that was owed beyond what had been paid is considered to be cancellation of debt, and is always taxable by the Internal Revenue Service. Many homeowners have been given bad advice and think that discharge or cancellation of debt by the bank entitles them to a free gift that is not taxable, this is not the case and discharged debt is taxable.
The tax consquences should always be considered when turning your keys back into the bank, it is never as easy as it seems, and homeowners could potentially get a huge tax bill at the end of the year if they are not careful.
There are many different ways you can owe the Internal Revenue Service when you foreclose on your house, we will only discuss a couple of the ways here. There were many people who bought their home under creative financing deals that the bank offered. When these loans adjusted, such as with the variable rate loans, it created disaster for the home owners.
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 debt that was owed beyond what had been paid is considered to be cancellation of debt, and is always taxable by the Internal Revenue Service. Many homeowners have been given bad advice and think that discharge or cancellation of debt by the bank entitles them to a free gift that is not taxable, this is not the case and discharged debt is taxable.
The tax consquences should always be considered when turning your keys back into the bank, it is never as easy as it seems, and homeowners could potentially get a huge tax bill at the end of the year if they are not careful.
About the Author:
Are you worried about foreclosure and how it will effect your life? Visit our webiste Mortgage What is the Process of Foreclosure to find out more information.
posted by Credit Counseling at
7:23 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home