Articles - homeoffersusa

Lately we are witnessing a spate of homeowners losing their homes in foreclosure. It was recently reported in the North County Times that California led the nation in total foreclosure filings during the last quarter. Apart from all the financial and emotional stresses involved in foreclosure, there are also some complicated tax that arise out of foreclosure.

All foreclosures are treated as sales for purposes of tax. Generally a 1099 form will be issued to you accompanied by an escrow closing statement which shows the total value for which the house was transferred to the lender and this information will also reported to the IRS. This closing statement will unfailingly include the unpaid taxes and interest that have accrued, as well as the principal balance of the loan at the moment of transfer.

As a seller, it is your immediate concern to determine if there is a taxable gain. Even though the rules relating to the sale of a personal residence were changed in 1997, many taxpayers are not aware of how to apply these rules. As it stands, it is no longer necessary to buy another home or be more than 55 years to exclude a gain. The critical point is you need to own and live in your home for at least two out of the previous five years. However, this two-year rule may not be rigidly enforced if you are selling because of a job change or due to some unusual circumstances. Since losing the financial ability to maintain a property has been found to be such an unusual circumstance, homeowners who lose their homes to foreclosure should be able to exclude considerably depending on their marital status. Unfortunately, capital losses resulting from the sale of your home are not deductible for tax purposes.

To avoid paying unnecessary taxes when you sell your property under foreclosure, it is important for you to have a record of the cost of your home which would include the initial purchase price and all of the expenses for improvements during the time you owned the home. If the original purchase followed a gain on a previous home that was deferred under pre-1997 rules, then this will further lower your original cost and increase the potential gain.

There could be another surprising tax benefit for having your home loan foreclosed. If you were under financial stress, you may have stopped paying interest and property taxes for a while. During foreclosure, these expenses that have been deferred by you will be now paid by the lender. The strange result is that even though you lose your home and have not been paying the taxes or interest in cash, you may still be able to claim these items as itemized deductions. It may be preferable that instead of opting for the foreclosure route, you may consider a short sale route to save your credit. When it comes to short sale situations, the mortgage company accepts a lower payoff amount to allow the homeowners to sell the house and prevent foreclosure. The bank is considered to have sacrificed a portion the original debt, and 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 accepts. When a house is completely foreclosed and sold at sheriff sale, the property obviously sells for less than what the homeowners owed on the loan. In such cases, there would be no tax liability as the homeowners realize no gain from the sheriff sale.