In most cases, paying more taxes means that you’re earning more income. Depending on your specific situation - perhaps you’ve received a bonus at work or even won the lottery - that can be a good thing, since you’ll still come out ahead financially even after getting taxed by Uncle Sam.
While paying more taxes after receiving a lump sum of money doesn’t sting too hard, feeling Uncle Sam’s wrath after a foreclosure can seem like you’ve been beheaded by a rusty sword. That said, if you’ve foreclosed on your home, here’s what you should expect on your taxes.
The Internal Revenue Service Equates Cancellation of Debt to Income
According to the IRS, you don’t gain anything financially if someone gives you a sum of money but says that you have to pay it back. Conversely, if the same lender calls you the next day and says never mind, then you’ve just gained that monetary amount. Using that logic, foreclosing on your home is like coming into money, since you aren’t obligated to pay the lender back.
The Mortgage Forgiveness Debt Relief Act of 2007 Helps Homeowners
Fortunately for homeowners dealing with a foreclosure, Congress enacted the MFDRA of 2007 in response to the housing crisis and has extended it numerous times since. The MFDRA lets homeowners exclude the reduction or elimination of debt because of foreclosure or mortgage modification from their incomes. Here are some things to keep in mind if you think you qualify.
It only applies to a primary residence
The balance on the loan must be $2 million or less
The discharge of debt has probably been excluded from your income if you foreclosed on your home while also filing for bankruptcy
Remember, your lender will give you a 1099-C cancellation of debt form that will show the amount of debt that will be forgiven. You must report this amount on your tax return.
Stephen K. Hachey can help you wade through this difficult process to reach a positive solution. Call 813-549-0096 today!
***The opinions in this blog are those of the author whom takes full responsibility for the content. Like all other content on the site, this does not constitute legal advice and is for general information purposes only.***
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