Wednesday, May 11, 2011

Foreclosure Tax Ramifications

Be aware of a possible tax liability in a short sale or foreclosure. In regards to a short sale or foreclosure, usually under the tax laws, if your debt ir canceled or forgiven, that is taxable income to you. Basically, the difference between the amount of the loan the price the property brings.

If you lose your house by foreclosure or short sale, to add insult to injury, you may have to pay tax on this "income". There may be some relief if the debt was on your principal residence. Under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million.

If the debt was on a second home or an investment property, then you are out of luck; the amount that was forgiven (or canceled) is taxable income to you.

If your canceled debt was on a refinanced loan, the law is murky. If you used the refinance proceeds to substantially improve your house, the there is no tax to pay. But if you used those proceeds for other purposes the cancellation creates a taxable event for you.

If you are facing possible foreclosure or short sale, be sure to contact a good tax accountant and or attorney to discover what your options and possibilities are.

The IRS has an excellent, free publication on this topic, called "Cancelled Debt, Foreclosure, Repossessions and Abandonments." It is Publication 4681, and will soon be published at the following link on the IRS website: or by calling 800.829.3676 or 800.Tax.Form