| As we all know by watching the news, the real estate | | | | pay taxes on it! |
| market is pulling back hard from the days of glory | | | | As foreclosures go up around the nation, more and |
| earlier this decade. In fact, many people are losing their | | | | more people are getting very surprising letters from |
| homes to foreclosure. Few realize the tax | | | | the IRS. It isn't bad enough that you have lost your |
| consequences of losing one's home. | | | | home, you now have a monstrous tax bill. This also |
| The Internal Revenue Service looks at things in a | | | | applies to situations where a short sale is undertaken. |
| strange manner. What you may see as a loss, it sees | | | | So, is there anything you can do? Yes. The key is to |
| as a gain. How could this possibly be? Well, the | | | | get an appraisal of the home before you are |
| agency takes the view that any loss that relieves you | | | | foreclosed on. This forces the lender to value the |
| of a financial obligation is actually a monetary gain. Let's | | | | home at an objective price, not some low figure it |
| look at an example. | | | | arbitrarily sets. This is important as you are taxed on |
| Assume I own a house. I am carrying a $200,000 | | | | the difference between the value of the home and |
| mortgage on the home. I run into problems making the | | | | what you owe. |
| payments and the home goes into foreclosure. I | | | | In addition to the appraisal, you can make arguments to |
| eventually am evicted and the bank takes back the | | | | the IRS. There are different approaches, but the basic |
| home. I have lost the house and my credit is a disaster, | | | | idea is to suggest you received no gain and are |
| but I am off the hook for the $200,000. Life could be | | | | insolvent. The IRS can then waive the tax liability. |
| worse, right? Well, it is about to get much worse. | | | | If all else fails, there is always the bankruptcy route. |
| The IRS is very interested in that $200,000 mortgage | | | | Although taxes generally are not terminated through |
| debt. The agency takes the view that the relief from | | | | bankruptcy, the "gain" you are perceived to have |
| that debt can actually be considered income to me. | | | | received is. Since there is no gain, there can be no tax |
| Yes, the IRS views the foreclosure as though I have | | | | and you are off the hook. Of course, this approach |
| received a $200,000 salary for the year. You can | | | | shreds whatever small amount of positive credit you |
| guess what comes next. The agency wants me to | | | | had left, but it beats a big tax bill. |