A few days ago, Roni Deutch – founder of the Roni Deutch Tax Centers – posted a new-featured blog on her personal blog, RonisBlog.com. In the entry, she discusses the tax consequences of home foreclosures and what actions the government is taking to help the thousands of families affected by this harsh tax law. Below is a snippet of the entry, but you can see the full entry at RonisBlog.com.
As everyone in the country knows, the real estate and mortgage industry has been in trouble over the past few years. Thousands of families find themselves in financial trouble due to drastic rate increases in adjustable rate or interest only mortgages. Most people failed to consider the possibility of the huge increases upon entering the agreements. Only now, they find themselves with mortgage payments that they cannot afford to pay. Often, foreclosure is the only option available to these struggling families. However, there is one important aspect of a foreclosure that people forget – the resulting tax liability.
Foreclosure is always the last resort for someone struggling to make mortgage payments. People usually think it will be the end of their problems. However, the IRS considers debt canceled through foreclosure to be part of a taxpayer’s income. The IRS feels that it is entitled to the appropriate income taxes on that money. It also has access to every taxpayer’s financial information so it can ensure the appropriate taxes are paid. Moreover, as most of the country already knows, the IRS is very aggressive in collecting taxes that they know are outstanding and feel they deserve.
Forecasts indicate that over 20% of the loans made sine 2005 to people with weak credit using interest only or sub prime loans will end in foreclosure. Typically, these loans require little or no down payment and begin with extremely low payments that quickly rise with rate adjustments. Due to paying so little toward the principal amount and the lowering value of homes across the nation, people are increasingly finding themselves upside down in debt with huge mortgage payments.
Read the rest at RonisBlog.com: Tax Consequences of Foreclosures.