IRS Provides Foreclosure Tax Relief For Homeowners
- Date: 2007-11-07 - Word Count: 448
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As if a foreclosure on your home isn't bad enough, do you realize there could be dire tax consequences? Fortunately, the IRS is taking steps to mitigate much of the double disaster.
Many have accused the IRS of speaking some foreign language over the years. The goal of this, of course, is to get the most amount of milk out of taxpayers with the minimum amount of moo. The milk is money and the moo is protest. One area where a lot of mooing is occurring is with the tax consequences of being relieved from the burden of a lot of debt.
If you owe a large amount of money for something, you probably don't think of it as income in any way. Well, the IRS does in one situation. If you are relieved of a large amount of debt, the IRS views that relief as a form of income to you and it expects you to pay income taxes on it.
In the case of homeowners facing foreclosure, this can lead to disaster. If you owe $400,000 on a home and lose it to foreclosure, you have been relieved of $400,000 in debt and your home. The IRS somehow views this as a good thing and credits you with $400,000 in income and expects you to pay tax on it.
Now, there are some big mitigating factors. The primary one is you get to "deduct" the value of the home from the debt. If the home is worth $400,000 and you are relieved of $400,000 in debt, then everything is a wash and there is no tax due.
So, what happens if the home value is only $300,000? Do you now owe income tax on $100,000? Yes, but there may be an out. The IRS allows insolvent taxpayers to reduce their tax by the total amount of their debts compared to assets. If you have lost your home, you can certainly make an argument that you are close to or completely insolvent.
Assuming you are stuck with some phantom income, you may also want to consider the filing of an offer in compromise to mitigate the debt. An offer in compromise essentially tells the IRS you owe a certain amount and can't pay it based on your assets. Given the loss of your home, the IRS is known to be receptive to such arguments and greatly reduce any tax due.
Losing your home to foreclosure is bad enough. If you have additional income tax problems, it is worth your time to sit down with a tax expert and find out how to deal with it.
View properties or list your home FSBO for 1 month free at FSBOAmerica.org.
Many have accused the IRS of speaking some foreign language over the years. The goal of this, of course, is to get the most amount of milk out of taxpayers with the minimum amount of moo. The milk is money and the moo is protest. One area where a lot of mooing is occurring is with the tax consequences of being relieved from the burden of a lot of debt.
If you owe a large amount of money for something, you probably don't think of it as income in any way. Well, the IRS does in one situation. If you are relieved of a large amount of debt, the IRS views that relief as a form of income to you and it expects you to pay income taxes on it.
In the case of homeowners facing foreclosure, this can lead to disaster. If you owe $400,000 on a home and lose it to foreclosure, you have been relieved of $400,000 in debt and your home. The IRS somehow views this as a good thing and credits you with $400,000 in income and expects you to pay tax on it.
Now, there are some big mitigating factors. The primary one is you get to "deduct" the value of the home from the debt. If the home is worth $400,000 and you are relieved of $400,000 in debt, then everything is a wash and there is no tax due.
So, what happens if the home value is only $300,000? Do you now owe income tax on $100,000? Yes, but there may be an out. The IRS allows insolvent taxpayers to reduce their tax by the total amount of their debts compared to assets. If you have lost your home, you can certainly make an argument that you are close to or completely insolvent.
Assuming you are stuck with some phantom income, you may also want to consider the filing of an offer in compromise to mitigate the debt. An offer in compromise essentially tells the IRS you owe a certain amount and can't pay it based on your assets. Given the loss of your home, the IRS is known to be receptive to such arguments and greatly reduce any tax due.
Losing your home to foreclosure is bad enough. If you have additional income tax problems, it is worth your time to sit down with a tax expert and find out how to deal with it.
View properties or list your home FSBO for 1 month free at FSBOAmerica.org.
Related Tags: mortgage, real estate, relief, home, house, foreclosure, income tax, irs, offer in compromise, default
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