After the housing market dropped, many homeowners turned to short sales or foreclosures to make up for declining property value. While a short sale or property foreclosure might relieve a homeowner of mortgage payments, the Internal Revenue Service could be the next link in the debt chain.
Tax laws treat debt forgiveness as a financial benefit. So, people believing they have just escaped unmanageable debts may find that their banks report the discharged debts to the tax department, who then comes collecting.
The key to ultimate debt relief is knowing whether you are exempted from having to pay taxes on the money “saved” through foreclosure or short sale, ostensibly the amount that was lowed on the loan.
In some cases, both the total loan and tax consequences may be forgiven. When mortgage debt is canceled through foreclosure, the forgiven debt may not be taxable if you are insolvent or if you are filing for bankruptcy and going through the home foreclosure at the same time. But the tax department distinguishes between cases in which people choose foreclosure for strategic relief from a poor investment and individuals who do not have the resources to avoid foreclosure.
It’s important when considering foreclosure to understand all your options and liabilities. It’s important to “Know Your Options. Know the Law.” Consult a reputable law firm with experienced bankruptcy and foreclosure teams to help you explore, consider and understand the liabilities involved with legal proceedings such as foreclosure, bankruptcy and other types of debt relief and forgiveness.
If you surrendered your home through foreclosure or short sale and have concerns about how tax implications may affect you, speak with a qualified attorney or contact Daley Law.