Articles - homeoffersusa

We are now witnessing a sudden phenomenon of homeowners losing their homes in foreclosure. Apart from the financial stresses, there will be some complicated tax implications to grapple with.

A foreclosure continues to be treated as a sale for tax purposes. Usually, a 1099 form will be issued to you and reported to the IRS, reflecting the gross proceeds of the sale. This will be accompanied by an escrow closing statement showing the total value for which the house was transferred to the lender. This closing statement will typically include the unpaid taxes and interest thereon, as well as the principal balance of the loan at the point of transfer.

When a house is completely foreclosed and sold at sheriff sale, the property mostly sells at a price less than what the homeowners originally owed on the loan - more so, when you include fees, courts costs, and interest. In such cases, there would be no tax liability because the homeowners realize no gain from the sheriff sale. As a matter of fact, they lose money, and no taxes are payable when the money is lost. The property is merely foreclosed and sold to the highest bidder with the foreclosure victims realizing no gain from the situation.

To make sure you do not pay avoidable taxes when you sell, it is important for you to keep track of the cost of your home which would include the initial purchase price and all costs towards improvements you carried out during the time you owned the home. If the original purchase resulted in a gain on a previous home that was deferred under pre-1997 rules, then this will further lower your home cost and increase the potential gain.

When short sale situations arise, though the mortgage company takes a lower payoff amount to facilitate the homeowners to sell the house and prevent foreclosure, there will be a tax liability. The bank is deemed to have written off a portion the original debt but the IRS treats this as income to the homeowners. They will have to pay taxes on the difference between what they owed on the loan and the actual amount that the mortgage company is willing to accept. So, whatever the yearly tax rate is, they will have to add this amount to their income and be taxed at the appropriate rate. The amount forgiven in the short sale may be taxed at the lower rates or the highest rates, but this will depend on how much overall income the homeowners receive. Unfortunately, in an environment of rising home prices and frequent refinancing, it is possible to have a gain from foreclosure.

There could also be a strange tax benefit to having your home foreclosed. Assuming you have stopped paying interest and property taxes for a while then during foreclosure, these deferred expenses are paid by the lender. So curiously you lose your home but may still be able to claim these as itemized deductions. Instead of going the foreclosure route, you may consider a 'short sale' to save your credit
The actual rate, at which the foreclosure victims pay taxes, depends on how much money they stand to gain. Hence, it is important for them to contact the IRS or a tax professional to determine their actual tax rate.