How does a foreclosure affect taxes?
No one buys a home to foreclose on it. Foreclosure is one of the most difficult situations that individuals and families face. Homes are a part of us and when your home is foreclosed on, it feels as if that part of you is lost. Aside from the emotional part of foreclosure, there’s serious financial ramifications to be dealt with. And it’s not just credit damage or the loss of an asset. Foreclosing on a home can have tax implications as well.
A foreclosure is considered a debt cancellation. Debt cancellations are considered taxable according to the IRS. This is because it’s a reduction in the amount of money you typically owe. Many consider this a “phantom” income because the individual increased their taxable income without actually gaining additional funds.
So if the financial and emotional stress of a foreclosure is not enough. You may potentially pay m ore taxes as well. However, there are exceptions. According to the IRS, debt cancellation is not taxable if:
- You file for bankruptcy as debts cancelled in this situation are not taxable
- You are insolvent. If your total debts are more than the fair market value of your total assets than your canceled debts may not be taxable.
- Your loan is a non-recourse loan. If the only alternative for the lender is to repossesses the property in the case of default. The debt cancellation may not be taxable.
It’s also important to consider that if you have a home equity line of credit or a second mortgage and you have a foreclosure that it is also considered taxable by the IRS.
Foreclosure is traumatic from a financial and emotional standpoint. The help of a knowledgeable and experienced Tampa foreclosure attorney can make all the difference in the world. Contact McIntyre Thanasides Bringgold Elliott Grimaldi & Guito, P.A today at 844-511-4800 for help with this process.