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As we all know by watching the news, the real estate market is pulling back hard from the days of glory earlier this decade. In fact, many people are losing their homes to foreclosure. Few realize the tax consequences of losing one's home. The Internal Revenue Service looks at things in a strange manner. What you may see as a loss, it sees as a gain. The agency takes the view that any loss that relieves you of a financial obligation is actually a gain. Let's look at an example. Let's say I hypothetically purchased a home three years ago. I have a balloon loan on which I owe $400,000. Rates rise and I can't make the payments. Foreclosure proceeds get underway and I am eventually given the boot. I have lost the house and my credit is a disaster. That being said, however, I am off the hook for the $200,000. Life could be worse, right? Well, it is about to get much worse. How could the IRS possibly be interested in me after a foreclosure? It all has to do with that mortgage. Remember how I owed $400,000? When the foreclosure occured, the debt was terminated. The IRS considers this a form of income to me. Night is day, day is night. This is how the IRS views the situation. The fact i don't have to pay back $300,000 doesn't mean I have any more money to my name, but the IRS doesn't care and, oh, it wants me to pay income tax on it. Watch the news for five minutes and you know what is going on in real estate. Values are down, interest rates are up and so are foreclosures. Thousands of peopel are running into this tax situation, even if they short sale their properties. Do you have any way to fight off the IRS? Yep. You need to get a written valuation of your home before getting booted. Tax in this stuation is figured on the difference between what you owe and the objective price of the property. In addition to the appraisal, you can make different arguments to the IRS. There are various approaches, but the basic idea is to suggest you received no gain and are insolvent. The IRS can then waive the tax liability. If all else fails, there is always the bankruptcy route. Although taxes generally are not terminated through bankruptcy, the "gain" you are perceived to have received is. Since there is no gain, there can be no tax and you are off the hook. Going into foreclosure is bad enough from the straightforward perspective of losing your home. Throw in a large tax bill, and it is a real killer. Do your best to avoid this situation by selling that home or making arrangements to handle the debt.
Article Source: http://www.realestateinvestmentarticles.net
Richard Chappoe is with BusinessTaxRecovery.com - providing expert tax debt relief today from those unpaid taxes that have been following you.
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