Last year my parent's home was foreclosed on. They moved and haven't been doing too bad since. My father leased a semi and now they finally seem to be getting back on their feet. Today my mother tells me that because of the foreclosure they have to pay $25000 in tax. Why is this and how can this be? I just got over seeing my parents deal with huge financial problems, if they have to file for bankruptcy because of some stupid tax my father will lose his semi. He was so proud to be running his own little business, this will destroy my parents. I've seen them have to deal with so much over the last three years, I just cant stand to see this happen. Why would they have to pay tax on a property that was taken from them and then sold? They were not behind on taxes either, so I just dont understand. Please help.
2007-03-26 12:33:40 · 5 answers · asked by AKM 1 in Business & Finance ➔ Taxes ➔ United States
I can only guess that your parents received a cancellation of debt due to the foreclosure. A cancelled debt is considered as ordinary income by the IRS. There is an exception to this if they were insolvent at the time that the debt was cancelled. If their total debts exceeded their total assets when the debt was cancelled they are considered insolvent and no income is recognized and no tax is due.
Your parents should consult with a CPA or tax attorney to see if they can get out of this situation. It should be pretty easy for a pro to clear this up quickly.
2007-03-26 12:59:41 · answer #1 · answered by Bostonian In MO 7 · 3⤊ 1⤋
Your parents have received a 1099C-Cancellation of debt. Whenever a home is foreclosed, car taken away due to non payment, or a credit card company "forgives" a portion of your debt, they issue this form. Pretty much you have to report it as income. The only way you can usually get out of paying tax on that income is if you file bankruptcy in the same year that the debt is cancelled. Even if they file bankruptcy, it won't cancel the federal tax that is due. Unfortunately, there is no way around that one.
For the future: Don't make any big decisions financially without seeking the advice of a tax professional first. This is the biggest mistake a client can make. If you think of withdrawing money from an IRA, 401K, letting the bank foreclose on your home, going into business for yourself, get professional advice before doing it. Not after.
2007-03-26 22:05:49 · answer #2 · answered by Fool in the Rain 6 · 0⤊ 0⤋
If a home is foreclosed on, it means the bank takes it and sells it to cover the money owed. Whatever the house sells for over what the bank had due is then sent to the original owner, which would be your parents. If there was 40,000 owed at time of foreclosure, the property sells for 65,000, then the bank would send 25,000 to the person who had the home to begin with. That's considered capital gains, and you have to pay taxes on it. Sort of a kick in the teeth isn't it? We took your house, here's some cash oh and you owe about 50% of it to the IRS.
Your parents need to contact a GOOD CPA. I would imagine there is a way out of it, the house would be considered a loss on an investment I would think. I really don't know though.
2007-03-26 19:48:33 · answer #3 · answered by Jadalina 5 · 0⤊ 1⤋
When your home is foreclosed, the bank sells it at auction. This is often a con, the house is sold to a person working at the bank or a friend of someone for less that market value.
Anyway, when they get less than is owed on the property, the difference is considered "forgiveness of debt" and is taxable as income.
By the way, it does no good to go bankrupt to get out of taxes. Bankrupcy does not forgive tax debts.
Sorry
2007-03-26 20:51:31 · answer #4 · answered by irongrama 6 · 0⤊ 2⤋
Unfortunately, neither income taxes or property taxes are eliminated when filing for bankruptcy. Do you know what kind of tax this $25,000 is? There are several different kinds (our government has gotten really good over the years at squeezing every available penny from hard working Americans). My suggestion would be to contact one of the tax relief firms. I can't recommend one because I'm not certain where you are from. But I would highly recommend talking to a lawyer or an accountant of some sort. Most will do a consultation for free and base their fee on income and factors like that. I hope this is at least remotely helpful to you.
2007-03-26 19:44:41 · answer #5 · answered by lupinesidhe 7 · 0⤊ 4⤋