- Plans & Services
- Tools & Tips
- About Us
With housing prices tumbling nationwide, many homeowners are faced with owing more than what their house is worth. Others are finding that their adjustable rate mortgage that seemed so affordable when they first moved in is no longer manageable now that it has adjusted. If you find yourself in a similar situation, be sure to understand the tax implications involved before making any major decisions like letting your home go to foreclosure, selling your house for less than you owe, or restructuring your loan through a loan modification.
When a home goes to foreclosure, the lender will often forgive the difference of what is owed and the amount of money they end up receiving when they re-sell the home. Generally, tax law treats any type of debt forgiveness as a financial benefit, and therefore taxable income. As a result the lender would then issue a form 1099-C to the borrower who has to report that amount as income when filing taxes for that year. For example, if the borrower owes $100,000 and the bank sells the foreclosed home for $70,000, the borrower would be liable for $30,000 of additional “income” at tax time.
Currently, the Mortgage Forgiveness Debt Relief Act of 2007 allows the borrower to exclude this debt as long as the home is their primary residence. However, this Act is set to expire on January 1, 2013 and since the foreclosure process is not always fast moving, action taken in 2012 could easily carry past the expiration date.
In addition to foreclosure, some other circumstances where a borrower could have debt forgiven potentially covered by this Act are:
The details of this Act can get complicated, because only the debt that was used to purchase or improve the home is covered. So what you used the funds you borrowed for is important. If you refinanced and took cash out to pay for your daughter’s wedding, that portion of the money would not be exempt from taxation if forgiven. So, if you have a similar situation, you should probably seek professional tax and /or legal advice before proceeding with a foreclosure and expecting the forgiven debt not to be taxable.
According to the IRS, there are some situations where the cancellation of debt is not taxable. Some of these are:
Keep in mind that the Mortgage Forgiveness Debt Relief Act also only applies to federal tax liability. Individual states will have their own laws as it applies to forgiven debt, so be sure to check the specific laws of your state. Most states maintain a website that you can locate online by typing your state’s name or abbreviation and “.gov” into any major search engine. Once there, you can search for taxes and “forgiven mortgage debt” to see how it is handled at your state level.
If you are having trouble keeping up with your mortgage payments or find yourself in a situation where you owe more than your home is worth, be sure to consider all the implications before deciding what action to take. It’s not only that you might lose the money you have already invested in the purchase and maintenance of your home, but depending on the current tax implications, you might find yourself out of a home and saddled with an additional tax burden. You can read more regarding the consequences of home foreclosure and the cancellation of debt on the IRS website.
Please Note:This information is provided for informational purposes only and should not be construed as legal or tax advice. If you have questions concerning your situation, you should consult with your tax and/or legal advisor. There may be additional information that you can use on the IRS website.
If you own a home, one of your biggest concerns is making sure you can make your mortgage payment each month. If you fall behind on payments, whether it's because of a loss of income or unexpected expense, you could risk foreclosure. You may be surprised to learn that lenders are willing to work with borrowers to help keep their homes-as long as you keep the lines of communication open and are willing to ask for help. There are some steps you should take as soon as you realize that making your mortgage payment could be a problem.
Government Programs to Help Pay Your Mortgage
In today’s challenging financial times, it’s crucial not to miss any opportunity to save money – especially on your taxes, since they can be a significant expense. In this article, we’ve listed some deductions that could be easy to overlook.
If you’ve been with the same employer for a number of years, you may not even remember setting up the number of allowances you wanted your employer to figure when calculating how much tax to withhold from your paycheck. The form you filled out is called a W-4. There’s a good chance that your situation may have changed since you first filled out that form, so it’s a good idea to re-evaluate your situation each year to determine whether you should adjust your withholding.
1. You May Be Able to Negotiate a Lower Amount If You Owe Back Taxes – Although the IRS is aggressive in its collection efforts, it does acknowledge on its website that if you do not have the ability to pay your back taxes in full, you may be eligible to settle for a lesser amount through an Offer in Compromise. 2. They Don’t Want To Seize Your Assets – Usually it’s too expensive to seize your physical property and hold a public auction, unless there are large sums of money involved and expensive property. But you still don’t want to be delinquent, because it’s relatively easy for them to seize a bank account or garnish wages, and they will if you are in default on your taxes and don’t work out a payment arrangement with them. 3. They Don’t Want to Take You to Court – A trial is relatively expensive so they will probably try to exhaust all avenues and be open to a settlement before going to court. If you have a dispute, there is an appeals process designed to resolve tax controversies without litigation. Remember though, the law is on the side of the IRS if you are at fault. 4. Their Agents Can Make Mistakes – The IRS is not infallible and when you are dealing with lots of numbers there’s always going to be mistakes. If you are convinced that they made the error, not you, file a complaint. 5. You Need to be Persistent and Organized – The IRS is a huge bureaucracy serving hundreds of millions of taxpayers, so don’t expect them to cater to you with outstanding personal service. If you have an issue, it pays to document as much as possible to support your case. And pay attention to dates and deadlines, because once they notify you of a hearing, etc. they aren’t going to send you friendly reminders, it’s up to you to be there. Note: This is not to be construed as tax or legal advice. If you have questions concerning your situation, you should consult with your tax and/or legal advisor. There may be additional information that you can use on the IRS website.
What's your debt IQ? Take one of our quizzes and find out how much you know about financial fitness.Take the Quiz Now!
Subscribe to our newsletter, packed with great articles, tips, and advice to help you make the most of your money.Subscribe Now!
Our calculators can help you figure out your budget, credit card payments, mortgage, and more!Learn More