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’.
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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.
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You do have one escape from the extra taxes that foreclosure – or walking away from the house will produce.
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That is insolvency. I explain it in a recent MarketWatch.
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com article. And IRS had a teleseminar on this topic earlier this year.
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TaxMama article – Facing a tax bill on cancelled debt? There is a way out

IRS Forum on Tax Consequences of Canceled Debt

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

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