Imagine this, you get a bill from the IRS for unpaid income tax after you filed your tax return. You think to yourself, "How on earth did I not pay enough in tax? It gets deducted automatically from my paycheck." You read through the bill to find that the IRS says you did not report this additional income of $160,000. How does this happen. Listen carefully.
Let's talk about why you should avoid foreclosure. You may think to yourself, " I don't really care about how it will affect my credit." You may not care about the problems that may occur from foreclosure. I hear this far too often from home owners losing their home to foreclosure.
But, did you consider this. There is tax liability with foreclosure that you may not be aware of. When a property is foreclosed on ownership transfers to the lender. The lender then sells the property to recoup their losses. The amount of your loan balance minus the proceeds from the sale of the property equals the amount of your cancelled debt. The lender writes off this amount to the IRS with a 1099 form. This amount is then counted against you as taxable income by the IRS. That's right, the amount that is left unpaid on the loan is now your tax responsibility.
ON the flip side, selling your home as a short sale is different. A properly negotiated short sale may significantly decrease the amount of cancelled debt which makes your tax liability less. Why is this? The amount you can sell your home for as a short sale is generally greater than the amount the bank can sell your home for after they foreclose on it. Consider the amount the property loses in value from the time the bank forecloses to the time they sell it. The length of time from foreclosure to sale can be a few months or even a year depending on the banks inventory of foreclosures. The fact that the lender will receive a lower price for the home after foreclosure is due primarily to the cost of the foreclosure process, the value that is lost just from being a vacant home, possible vandalism, and Realtor commissions.
As an example, you have a $250,000 mortgage, the bank forecloses and they sell the property for $90,000. They will write off the difference of $160,000 to the IRS. This amount is then counted as your income which you will pay income tax on. That's one big pay raise and you will never get to spend a dime of it.
If you sell your home as a short sale for $150,000 the lender will write off $100,000 to the IRS. This will increase your taxable income by $60,000 less than with a foreclosure. That's a big difference.
You see, foreclosure really should be avoided. Stay tuned for my next article which will explain exemptions from this income tax caused by the cancelled debt.
If you are struggling to pay your mortgage I have the solutions for you. As a Certified Pre-Foreclosure Specialist I will give you the answers to empower you to make the right decisions for you and your family. Visit my site at
http://mikepollak.yourkwagent.com to receive my free guide of eight options for staying out of foreclosure.
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