Foreclosures and Taxes Consquences
So you escaped the huge house payment and got out from under it, or so you thought. If you thought you had problems when you could not afford the mortgage, you will really have problems with the Internal Revenue Service.
We will discuss the different ways you will owe the IRS in detail later on. Many homeowners bought their house under liberal financing terms such as interest and variable rate loans. These loans have become a liablity for many banks as the rates adjust and people cannot make the new payment.
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.
A homeowner can owe taxes on a short sale when the bank forgives part of the balance or the debt is discharged. Homeowners should not think for a minute that cancelled debt is forgiven without tax consequences.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
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.
Owners of homes should always consider the tax consequences before they give thier home back to the bank, it is never as easy as it seems, and by giving their keys back to the bank, they could end up having a huge tax bill at the end of the year.
We will discuss the different ways you will owe the IRS in detail later on. Many homeowners bought their house under liberal financing terms such as interest and variable rate loans. These loans have become a liablity for many banks as the rates adjust and people cannot make the new payment.
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.
A homeowner can owe taxes on a short sale when the bank forgives part of the balance or the debt is discharged. Homeowners should not think for a minute that cancelled debt is forgiven without tax consequences.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
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.
Owners of homes should always consider the tax consequences before they give thier home back to the bank, it is never as easy as it seems, and by giving their keys back to the bank, they could end up having a huge tax bill at the end of the year.
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posted by Credit Counseling at
7:06 AM
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