IRS Provides Tax Information on Home Foreclosure
The Internal Revenue Service (“IRS”) has recently provided information to taxpayers about the possible tax consequences resulting from a home foreclosure. The general rule is that when a lender forgives a portion of a loan, the amount of debt cancelled constitutes taxable income for the taxpayer.
The IRS website highlights the exceptions to this rule, so taxpayers can consider their options before their property is foreclosed by the lender. The IRS also recommends that the taxpayer may want to consult with a tax professional, as devising a structure to limit the taxes resulting from a foreclosure is a complicated process.
Some of the exceptions are:
- Debt is discharged in bankruptcy
- An insolvent taxpayer (defined as a taxpayer whose debts exceed his/her assets) may not have to recognize all of the discharged debt on his/her tax return
- Cancellation of qualifying farm debts
- Cancellation of a nonrecourse loan
If the taxpayer’s property is foreclosed, the taxpayer will receive a Form 1099-C from the lender. The IRS urges taxpayers to review the Form 1099-C to make sure it is accurate. If the taxpayer is unable to pay the taxes arising from a foreclosure, the IRS describes the process for making an “Offer-in-Compromise” to the IRS, which may relieve the taxpayer of a portion of the debt and/or create a payment plan for the taxes.
To read the Q & A on the IRS website, visit: http://www.irs.gov/newsroom/article/0,,id=174034,00.html
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