Foreclosures Lead to Tax Traps - By: Richard Chappoe, Posted on: 2007-08-21

As we all know by watching the news, the real estate market is pulling back hard from the days of glory earlier this decade. In fact, many people are losing their homes to foreclosure. Few realize the tax consequences of losing one's home.

The Internal Revenue Service looks at things in a strange manner. What you may see as a loss, it sees as a gain. The agency takes the view that any loss that relieves you of a financial obligation is actually a gain. Let's look at an example.

Let's say I hypothetically purchased a home three years ago. I have a balloon loan on which I owe $400,000. Rates rise and I can't make the payments. Foreclosure proceeds get underway and I am eventually given the boot.

What a disaster. The home is gone and so is my equity in it. On top of that, my credit is now officially a disaster area, which effects my other credit obligations. Can you imagine a worse situation? Yes! The IRS is coming.

How could the IRS possibly be interested in me after a foreclosure? It all has to do with that mortgage. Remember how I owed $400,000? When the foreclosure occured, the debt was terminated. The IRS considers this a form of income to me.

Try to wrap your mind around that one. It can take a few efforts. Yes, the IRS views the foreclosure as though I have received a $200,000 salary for the year. You can guess what comes next. The agency wants me to pay taxes on it!

As foreclosures increase, more and more people are getting very surprising letters from the IRS. It isn't bad enough that you have lost your home, you now have a monstrous tax bill. This also applies to situations where a short sale is undertaken.

Do you have any way to fight off the IRS? Yep. You need to get a written valuation of your home before getting booted. Tax in this stuation is figured on the difference between what you owe and the objective price of the property.

With foreclosures climbing, the IRS is becoming more flexible in addressing this situation. People have successfully argued they should be relieved from the tax liability since they don't have a penny to spend.

As a final resort, you can look to the courts for protection. In this case, we are talking bankrupcty. The court can dismiss the underlying mortgage debt, which serves to terminate the tax due.

Suffering through a foreclosure is absolutely no fun to say the least. Adding a potentially large tax bill to the process is even worse. As more people face this problem, one has to hope the IRS will change direction.

Article Source: http://www.southerncaliforniarealestateagent.com/submit-real-estate-articles

Richard Chappoe is with BusinessTaxRecovery.com - deal with your back taxes today before the IRS catches up with you.

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