South Carolina Tax Attorney

QUESTION:

            Recently, I lost my home to foreclosure because my adjustable rate mortgage took off and I was not able to keep up with the payments.  I have heard that there are tax consequences for losing a home in foreclosure and I wondered if there was anything I could do about it.

ANSWER:

            You are correct that there are tax consequences when you lose a home to foreclosure.  When you borrow money to purchase a home, you do not have to include that money as income because you are required to pay it back.  However, when you are foreclosed and the bank is unable to collect the entire amount owed, they often forgive the amount you still owe.  Since you are not required to pay all of the loan back, the portion that you still owe becomes income to you which is taxable.  Of course, many times homeowners have a substantial amount of equity in a home when it is foreclosed and they have a “loss.”  This loss is not deductible on your taxes, however.  The year your debt is forgiven, you will receive a 1099-C from the lender showing the amount of the debt you still owed and the fair market value of the house.  Those values are used to determine the amount of taxable income you have for the forgiven debt.  The lender also provides the 1099-C to the IRS, so if you do not include it on your tax return, the IRS will come knocking looking for the additional tax.  If you owe this additional tax, we can assist you in negotiating a lower amount to the IRS or help you set up a payment plan to make a comfortable monthly payment. 

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