property owners fail to realize there are tax implications once they lose their home to foreclosure. When debt is forgiven, it’s a taxable event. As per IRS rules, borrowed money that’s not paid back is considered as income and is taxable. A mortgage involves a lender providing funds to the owner in return for a promise to pay the funds back. When the owner begins repaying the money, this money isn’t claimed as income on the lender’s tax return (although the interest is). If the debt amount if forgiven or canceled, it must be included as income for tax purposes. Since there’s no longer an obligation to repay the lender for the same, the loan amount is considered income. Tax consequences occur when the property is finally sold. This is because the original loan was based on the property’s value, and the values continue to change. If the property is sold for less than the amount it was originally worth, and the bank cannot recover all the money it lent, the balance will be reported to the property owner and the IRS. This is reported on a Form 1099-C, Cancellation of Debt, and the amount is considered income. This income must be reported on the homeowner’s income tax form leading to capital gains and income tax applicable. Typically, debts discharged through bankruptcy would be the only circumstance in which this income is not taxable. If the homeowner is labeled insolvent, or if certain farm debts and non- recourse loans are referenced, canceled debt tax could apply. The recommended course of action is to consult a tax professional for advice on your specific situation.
DIFFICULTY FINDING A NEW PLACE TO CALL “ O CALL “HOME”
The immediate problem after a foreclosure is to find a new home, and you’ll need a cash deposit. This tends to be the largest barrier
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