Foreclosure and Taxes

Today TaxMama hears from Margaret in California, who wants to know, “Do I avoid taxes on my properties if I let them foreclose vs. a short sale? I have pulled out equity to invest and improve my properties and now I am under water big time.”

Dear Margaret,

You won’t avoid any taxes at all by letting them foreclose. Nor will you avoid taxes by using a short sale – though your taxes might be a little less that way.

In fact, since you’ve refinanced and pulled money out, you’re quite apt to face cancellation of debt income. One of the recent tax bills included a provision to help people whose homes are foreclosed – but it only relates to, what is called “acquisition debt’. That is either the original loan on the house, or refinances where you just reduced the interest rate, but you did not pull additional cash out.

You do have one escape from the extra taxes that foreclosure – or walking away from the house will produce. That is insolvency. I explain it in a recent MarketWatch.com article. And IRS had a teleseminar on this topic earlier this year.

TaxMama article – Facing a tax bill on cancelled debt? There is a way out
http://www.marketwatch.com/story/facing-a-tax-bill-cancelled-debt

IRS Forum on Tax Consequences of Canceled Debt
http://www.taxquips.com/index.php?id=1210

Before making any decisions, sit down with a good tax professional and have them help you find a better way to deal with this.

And remember, you can find answers to all kinds of questions about cancellation of debt and other tax issues, free. Where? Where else? At TaxMama.com

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