Losing a Home to Foreclosure Could Mean Big Taxes If Exemption Expires in January
Usually the first day of a new year means a fresh start. But if a federal tax exemption is allowed to expire, this Jan. 1 could mean disaster for troubled homeowners.
When a portion of debt is canceled or forgiven, that amount is often considered taxable income by the IRS. However, thanks to the Mortgage Debt Relief Act of 2007, mortgage debt is currently forgiven by lenders in a short sale, foreclosure, or loan modification if the home is a primary residence.
In 2011, the law saved borrowers an estimated $1 billion, according to The New York Times.
Unfortunately, it's scheduled to expire Jan. 1, 2013.
What does that mean? Let's say you owe $300,000 on a home you can no longer afford. If the property goes for $200,000 in a short sale, the government will tax you on the remaining $100,000 forgiven by the lender - even though you never saw a dime of the money.
Additionally, any mortgage relief rendered under this spring's $26 billion foreclosure settlement, such as a loan modification, will only make homeowners liable for taxation.
While it's still possible that the exemption could be extended, it's also highly possible that lawmakers will be too busy grappling with current fiscal woes to renew existing laws.
Since short sales and foreclosures typically take several months (or even longer, depending on state laws) to complete, homeowners just entering the process today could already be looking at facing taxes.
So what do you do when you can't afford to keep your house - but you can't afford to lose it, either?
If the exemption expires as planned, filing for bankruptcy may be the only way to avoid a large tax liability.
When you have no choice but to walk away from your home, bankruptcy ensures that the remaining debt - and any associated taxes - can be discharged.
Of course, if there's a chance of saving your home, bankruptcy can also be your best friend.
As they say, an ounce of prevention is worth a pound of cure. Filing for bankruptcy has the power to relieve debt, often making it possible for delinquent homeowners to get current on mortgage payments.
If you're struggling to pay the mortgage, attempting to work out a solution with lenders, or in the foreclosure process, time is of the essence. The right bankruptcy plan can keep you from losing your home - and the shirt off your back.
Best of all, bankruptcy can provide the financial boost needed to get you and your family back on your feet. Laws may come and go, but bankruptcy is one consumer protection that's here to stay.
Missing mortgage payments? Facing foreclosure? Learn what bankruptcy could do for your financial situation when you call DebtStoppers at 800-440-7235. Call now to schedule your complimentary personal debt evaluation with an experienced bankruptcy lawyer in Tennessee, Chicago or Atlanta.
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Are Banks Bypassing Poorer Homeowners When Distributing Mortgage Relief?: November 19, 2012
Additional Resources:
Mortgages: End Is Nigh for Certain Tax Exemptions, by Lisa Prevost, The New York Times