Fact is, if the foreclosure of your home has wiped out your debt but you still have money coming to you, you may be liable for taxes on that amount. But there is relief available. For example, if your liabilities exceed your assets, you may be able to offset the net income generated by the foreclosure. This, and more, is explained by the IRS in a new section of their web site (IRS.gov). It is designed to help individuals and families who have lost property due to foreclosure. It is created to assist you in figuring out whether or not you might qualify for foreclosure-relief.
There are other kinds of help available. You'll find a form to fill out requesting a payment agreement. You'll also find help in settling your debt for some fraction of the total using what is called "an offer in compromise." Be aware that your relief may be less than you hoped. For example, if part of your home was used for business purposes you may not qualify. Also, if the home was a rental property, you may not get the benefits.
How it works
If your home is foreclosed, you will get a Form 1099-C at the end of the year from the mortgage company. This form will indicate how much debt was forgiven. It will also show the market value of the property given up under foreclosure. If the property was sold at auction, that is the fair market value, but not always. So check the 1099-C closely. If you find any inconsistencies or errors, you have to alert your lender.
In particular you should examine two numbers: the debt amount forgiven and the listed value for the property. Be aware that your lender has to forward a copy of the 1099-C to the Internal Revenue Service. They retain the right to contact you if the information on that form conflicts with anything you might report on your income tax return. So take responsibility now to avoid problems later.
Conclusion
The IRS will tell you that mortgage foreclosures and "workouts" can have devastating outcomes. But there are mitigating programs that can lessen the tax liability or even eliminate it for homeowners who qualify.
For more info on Tax Help for Foreclosure, visit Ara Rubyan's Your Tax Help Online
Ara Rubyan isn't an accountant, an attorney, or a financial guru. Instead, he is like you: a consumer who has tried to make an informed decision on the best way to manage his tax obligations.
Now, he's put all his research (so far) in one convenient location and he's sharing it with you, no strings attached. Visit his website. You'll find:
- Lots of articles on various tax help topics;
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As always, consult a qualified professional when looking for tax help. In the meantime, go on over to Your Tax Help Online and have a look.
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