With a foreclosure, how does this effect your taxes the following year?

Question

If you foreclose, what is the worst case scenario when tax time comes around. Can you file Chapter 13 then to get rid of your tax debt?

Answer 1

Bankruptcy doesn't get rid of tax debt. The foreclosure shouldn't affect taxes unless they forgave you some of the mortgage then it would be income. I assume you didn't make a profit on the home or you would have sold it before it foreclosed. If you did sell for more than you paid if you lived there two years you don't pay taxes on the first 250K of profit.

Answer 2

For tax purposes, a foreclosure is treated as any other sale. Although it's rare to turn a profit on a foreclosure it can happen. If so, the normal exclusion rules would apply and if you weren't eligible for the exclusion it would be treated as a capital gain.

Bankruptcy rarely will discharge a tax debt, and it will never discharge one for the current tax year.

If the balance of the mortgage was forgiven, the forgiven amount is treated as taxable income to you. You can avoid the tax if you are insolvent at the time of the forgiveness. You are considered insolvent if your total liabilities exceed the FMV of your assets when the debt is forgiven.