The IRS views forgiven debt as a form of income. We know that debt settlement can cause your taxes to go up. Did you know that foreclosure works the same way?
That’s right. If your foreclosed property sells for less than the mortgage balance, you have pay taxes on the difference. Some foreclosed properties are selling for tens of thousands of dollars below what is owed, meaning tax bills could reach several thousands of dollars extra. One proposed bill would change that though.
Mortgage Forgiveness Debt Relief Act of 2007
H.R. 3648 was passed by the US House on October 4th but is awaiting Senate approval. This appears likely, since the House vote was overwhelmingly in favor of passage (386 Votes For, 27 Votes Against).
What this would do is eliminate the tax on forgiven debt for a foreclosure sale in which your home is sold for less than the mortgage balance. This would not eliminate the additional tax incurred on other forms of forgiven debt though, including debt settlement.
Members of Congress have recognized that this penalty is the final nail in the coffin for many families that are losing their homes. Not only have they lost any equity that might have been in the home, but they also must find a rental, qualify with damaged credit and pay an enormous tax bill.
A short sale is one form of loss mitigation that a HUD approved housing counseling agency can discuss with you. Depending on your level of delinquency and financial situation, you may have many additional options to help you either limit your losses or perhaps keep the home.
If you are facing foreclosure, you should get help immediately before it is too late. Determine where you might be in the foreclosure process and get help now! Tomorrow might be too late.
Tags: Foreclosure, forgiven debt