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| Foreclosure And Income Tax Liability |
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| The Aftermath of Foreclosure - Taxes This is a very complex topic and we strongly suggest that you seek the professional advice of an accountant or lawyer. Losing a house to foreclosure is probably one of the most emotional events in your life. And we can understand how you might miss some important details that could end up costing you lots of money long after the house is gone. After you have lost your house through foreclosure, you might be facing a tax bill from the IRS. However, you could be off the hook because in specific circumstances, the Mortgage Forgiveness Debt Relief Act of 2007 excludes certain types of income from taxes. Debt that is reduced by having your mortgage restructured, or debt that is completely forgiven because of a foreclosure, usually qualifies for relief under the Mortgage Forgiveness Debt Relief Act. This refers to debt forgiven or canceled in the calendar years 2007 through 2012, and must be for your principal residence. For purposes of the Act, a principal residence is where you live most of the time. More specifically, where you resided 2 years out of the last 5 years. Qualified Principal Residence Indebtedness The key to the tax issue, whether you pay taxes or not, is the house and also what you use the money for. In the case of refinancing, the money has to be spent on the house. The IRS clearly states that the indebtedness must be for a qualified principal residence. For the IRS purposes this means that the debt was incurred in purchasing, refinancing or constructing a house to be used as your principal residence. The debt extends to remodelling and renovating the house. An important point to bear in mind is that when there is a refinancing, if part of the money is used to buy a new car, pay off credit cards or take a vacation, it becomes a recourse loan. This part will have to be included in your income and you might have to pay taxes if the loan is forgiven. For example, when you originally purchased the house, your home loan was $400,000. The house appreciated in value and you refinanced to $500,000. The market dropped the house is only worth $450,000 and you now owe $490,000. The $40,000 shortfall is cancelled by the bank. You will have to include this $40,000 as income on your taxes. On the other hand if you had used the refinance money to build an addition to the house, you wouldn't have to include the $40,000 in your income. Cancellation of debt When you borrow money to buy your house, the long range plan is to repay the home loan. Unfortunately, there are events which can derail the best laid plans. Sickness, job loss, college for the kids, are all factors that can potentially lead to financial ruin. In a foreclosure and subsequent sale of a house, the lender can cancel your debt if there is a shortfall in funds. In a simplified example, if you owe $200,000 on your mortgage, and the lender sells the house for $150,000, there is a deficiency of $50,000. The lender can then cancel the debt if the mortgage loan was a non-recourse loan. If it is a recourse loan, the lender can seize any other assets you have. If the lender reduces the principal balance of your home mortgage through a loan modification, the amount of principal debt reduced is a canceled debt. For example, if the principal balance on your mortgage is $180,000 and the loan is modified resulting in a new principal balance of $160,000 you will have a canceled debt of $20,000. You have to ask the lender if the debt is really canceled, or if there will be a silent second mortgage placed on the house. A silent second mortgage carries no interest and no payments are required. There is no relief for a cash-out refinance, a second mortgage or a Home Equity Line of Credit. Income caused by the cancellation of debt In a foreclosure, the canceled debt is generally considered income by the IRS. There are exceptions and exclusions, so consult your accountant. If it is a non-recourse loan, you have no taxes to worry about. A recourse loan on the other hand will trigger some taxes. If the cancellation of debt is deemed to be income by the IRS, then you have to include this amount in your income when you file your taxes for that year. An insolvent person will not be liable for any taxes when there is a foreclosure and the debt is canceled. Insolvency occurs when your assets are less than what you owe. For example if you owe $300,000 and your assets are only $100,000 then you are insolvent. Appealing to IRS If you receive a notice from the IRS and have to pay taxes, and you do not have the full amount, the IRS encourages you to fill out the installment form and pay in this manner. Any questions you may have, you can contact the IRS at www.irs.gov or call 1-800-829-1040. Another number to call is the Taxpayer Advocate Service at 1-877-777-4778. You might also consider the Low Income Taxpayer Clinic. These are local independent organizations that represent low income people in disputes with the IRS. This article addresses the tax implications from the point of Federal taxes. The Mortgage Forgiveness Debt Relief Act does not cover State taxes. State laws might vary. Please consult a tax professional. |
| Foreclosure Procedure: Know Your State Laws If you are in foreclosure it is important to know how your specific state handles foreclosure. In some state you have a judicial foreclosure, others you have a non-judicial foreclosure. Judges approve foreclosures in 23 states. In the other state lenders will use an out of court process. Judicial foreclosures are processed through your court system. The lender files a complaint saying that you have not paid the mortgage, and that you are in default. You will be served a notice and you will have the opportunity to defend yourself before a judge. If the court finds you guilty and rules against you, a judgment for the outstanding mortgage balance plus costs will be issued. Next comes a writ authorizing the sheriff the sell the property. The sheriff's sale is an auction and can be held on the steps of the courts, or at the house. At the end of the auction, the highest bid gets the house. After the sale has been confirmed, a sheriff's deed will be prepared and given to the new purchaser. Non-judicial foreclosures are processed without the involvement of the courts. When you default, the lender will mail you a default at the appropriate county office. If you do not pay the mortgage and bring it uptodate by a specified date, a public auction will be held. The highest bidder gets the house. Disclaimer: This is not legal advice. Since each state has its own rules, you should speak with a lawyer. Readers of this article also enjoyed: Your Mortgage Approval In 9 Easy Steps When To Get A Second Mortgage |
| Bank of America Re-starts Foreclosures October 18,2010 Bank of America has been hard at work is the last week preparing documents for foreclosure. This time B of A believes all the documentation is legal and should pass the test. We have to wait and see. No irregularities have been uncovered and B of A has 102,000 foreclosures to re-submit. As a result of this re-submission, the moratorium in the 23 states is basically over. It shall resume in November, assuming that all goes well. B of A will continue to delay foreclosures in the remaining 27 states until the review is complete. Why couldn't this new procedure be in place before? The damage is done. The bank stocks have taken a beating on Wall Street. Homebuyers are sitting on the fence. And realtors are scrambling to keep existing deals together. prev: next: Home: |
| Army Of Strategic Defaulters Grows Mortgage Bankers Association a strategic defaulter? I couldn't believe it. Well, it's just business. It a firm continues to lose money you shut it down. Same thing. Watch the above video. |
| Foreclosure Filings Rise We now know why there were so many foreclosures. The banks were not playing by the rules. Robo-signing and and other short cuts were employed on a regular basis. Watch the above video. |
| Foreclosures: Robosigning Investigation The foreclosure investigation across the country will delay the number of houses coming onto the market. We can expect serious damage to an already fragile housing market. Watch the above video. |
| Foreclosure Fraud: Where's The Original Note? Who owns your house? Who owns the original note to your property? Seems like an easy question. Until a few weeks ago we would have answered with confidence, "my bank, where I make my payments". Now we know that no one knows the answer not even the banks. The answer is there. But it would take some time to research and find the documents. During the boom days of 2005 through about July of 2007, all the players in the housing market made tons of money. Mortgages were originated, the sold, the bundled with other mortgages, and resold. How many times the mortgages were resold is anyone's guess. MERS was utilized to process the amount of volume that was coming down the pipeline. Now that the housing market is bust, bank want to foreclose and get the properties off their books. But there is a big problem. They do not have the legal authority to foreclose. They do not have the original document or note. Homeowners are fighting back. Sure they owe the money. But this is a country of laws and we expect that the banks will do things legally. We come to find out that as far as the banks are concerned, the law takes a back seat. Profit is in the driver's seat. Homeowners are crying "show me the mortgage note". Until the foreclosure is done legally the homeowners has the right to remain in the house. |
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