How Will Your Foreclosure Or Short Sale Affect Your Taxes?
Well, it's that time of year again.
They say that there are only 2 things guaranteed in life; death and taxes.
Hopefully death is a long way off, but the tax man comes knocking once a year.
So how does your foreclosure or short sale of real estate affect your taxes? In the same spirit of kicking you while you are down, the IRS has always considered forgiven debt to be taxable income.
For instance, if you owe $300,000 on your home and it is taken in foreclosure, the bank will sell the home to the highest bidder.
If that bid was $200,000, there would be a deficiency balance of $100,000 on the original debt.
The IRS considers this to be taxable income.
There has been a change recently though.
In December of 2007, President Bush signed into law a relief bill that will eliminate the taxes on forgiven debt on your primary residence.
This means that whether your home was foreclosed, or you did a short sale for less than the outstanding balance, you will not be penalized for the difference in original balance and what it sold for.
The bill will remain in effect through 2009, so you still have time to act on a short sale if you need to sell your home for less than the balance owed.
Home equity loans and lines of credit are also addressed with this bill provided that they were used for the purchase of the home, or to make improvements to it.
All other debt including unsecured credit card debt and deficiency balances on investment and vacation property will still be hit with the taxation on the remainder.
The only way to avoid this would be bankruptcy or proving insolvency with the IRS (which is no easy task).
You can learn more about the requirements for a short sale at www.
PreForeclosureFSBO.
com [http://www.
preforeclosurefsbo.
com].
In this difficult time in the real estate markets, it is important to know your options and how to move forward if you are facing foreclosure.
A foreclosure can remain on your credit for 7 years, and can seriously affect your ability to finance a home or even rent an apartment for quite some time.
If you are facing foreclosure and don't know what to do next, the worst thing you can do is nothing.
Please consult with your tax professional to determine your exposure and tax ramifications for either a foreclosure or a short sale.
They say that there are only 2 things guaranteed in life; death and taxes.
Hopefully death is a long way off, but the tax man comes knocking once a year.
So how does your foreclosure or short sale of real estate affect your taxes? In the same spirit of kicking you while you are down, the IRS has always considered forgiven debt to be taxable income.
For instance, if you owe $300,000 on your home and it is taken in foreclosure, the bank will sell the home to the highest bidder.
If that bid was $200,000, there would be a deficiency balance of $100,000 on the original debt.
The IRS considers this to be taxable income.
There has been a change recently though.
In December of 2007, President Bush signed into law a relief bill that will eliminate the taxes on forgiven debt on your primary residence.
This means that whether your home was foreclosed, or you did a short sale for less than the outstanding balance, you will not be penalized for the difference in original balance and what it sold for.
The bill will remain in effect through 2009, so you still have time to act on a short sale if you need to sell your home for less than the balance owed.
Home equity loans and lines of credit are also addressed with this bill provided that they were used for the purchase of the home, or to make improvements to it.
All other debt including unsecured credit card debt and deficiency balances on investment and vacation property will still be hit with the taxation on the remainder.
The only way to avoid this would be bankruptcy or proving insolvency with the IRS (which is no easy task).
You can learn more about the requirements for a short sale at www.
PreForeclosureFSBO.
com [http://www.
preforeclosurefsbo.
com].
In this difficult time in the real estate markets, it is important to know your options and how to move forward if you are facing foreclosure.
A foreclosure can remain on your credit for 7 years, and can seriously affect your ability to finance a home or even rent an apartment for quite some time.
If you are facing foreclosure and don't know what to do next, the worst thing you can do is nothing.
Please consult with your tax professional to determine your exposure and tax ramifications for either a foreclosure or a short sale.
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