Saturday, May 8, 2010
Tax Consequences of Foreclosure
We have been getting a lot of questions concerning the tax consequences of Foreclosures. It is definitely an important issue as IRS debt cannot be discharged in bankruptcy, and the income can be significant given the costs of housing in the Puget Sound. For more information, consider contacting a Seattle Foreclosure Attorney.
As a general rule, an debt that is forgiven (COD income)is subject to income tax consequences. Thus, debt discharged in a short sale or foreclosure would be subject to taxation.
There are, however, two very LARGE exceptions to the taxation of this COD income:
1) The 2007 Mortgage Forgiveness Debt Relief Act - this act protects borrowers for up to Two Million in COD income provided the home was purchased BEFORE JAN. 1, 2009 and was used solely to buy/ build repair or remodel a PRIMARY RESIDENCE.
2) The second, less talked about, and more relevant exception is when a taxpayer is deemed to be 'insolvent', defined as liabilities exceeding assets. For many borrowers facing a foreclosure, or short sale, this is often the case and protects many borrowers from tax burdens.
If you are not able to qualify under either of these exceptions, and you are faced with a tax burden, you should consider one of these 3 programs to protect yourself from IRS liens, and potential garnishments:
1) An Offer in Compromise
2) Entering Currently Not Collectible Status
3) A Payment agreement in which the debt can be spread out over 60 months.
See Tax dispute options here.
For more information, consider discussing your issues with a Kirkland Real Estate and Tax Law Firm.
Weitz Law Firm, PLLC
5400 Carillon Point
Kirkland, WA 98033
at 7:51 AM