If a person loses their house to foreclousre is it true that you have to pay the IRS tax on the banks loss?

Question

How much is the tax? what is the likelyhood that they IRS will give you some sort of leniency or reprieve given the fact you are obviusly in a tight financial situation to begin with? How would filing bankruptcy affect your tax liablity? With so many thousands of people losing their homes I would have to believe that the IRS would want to come up with some sort of new policy since so many people like never before in history will be facing such financial nightmares from losing their homes.

Answer 1

It is entirely possible that you could have to pay taxes on a house foreclosure. If the bank suffers a loss because of your foreclosure, if you don't pay them back their losses, then you could possibly get a 1099 for forgiveness of debt, which would be income to you. As for the IRS giving leniency, IT'S THE IRS. Bankruptcy also more than likely would not affect tax liability, there are very strict guidelines as to what taxes can be wiped out in a bankruptcy. As for a new policy from the IRS, the government did not directly create the housing situation mess, the borrower and the lenders did. Borrowers borrowed more than they could realistically afford, and lender lent under any and all circumstances. People got themselves into their own trouble, so the IRS is not going to bail people out of it.

Answer 2

The 1st thing you have to understand is that the IRS does not make policy. They only enforce the law that congress writes. If there is going to be any relief apart from current law then congress will have to provide it.

Bankruptcy
A chapter 7 bankruptcy will wipe out tax debt if it is old enough (not sure but I think it has to be 3 years old). A chapter 13 bankruptcy will not wipe out taxes but, while you are under the protection of the bankruptcy trustee the IRS must stop all collection activity and freeze penalties and interest. While the plan is in effect the trustee will send payments to all your creditors including the IRS or any state taxing authority. After you emerge from the plan you still owe the IRS what you did before minus any payments the trustee sent to the government. Since all you other debts have been discharged you should not be able to pay the government usually with an installment agreement (penalties and interest start again).

Cancellation of debt

Under normal circumstances when a debt is forgiven you must include the forgiven amount in your income on line 21. Cancellation of debt is taxed at your marginal rate. Most people know that you are supposed to pay tax on goods and services you receive (bartering) instead of cash. Congress thinks that since you received the value of goods (the debt that is forgiven) you should pay tax on it.

An example; you owe $5,000 to VISA, have lost your job and can no longer make payments. After VISA hassle you for a while and can’t collect any money, they will make you an offer something like “pay us $2,500 and we will call it even”. If you scrape up the money and give it to them at the end of the year they will send you a 1099-C with the forgiven $2,500 on it. See Pub 908 Bankruptcy Tax Guide

With your home it is a little different; if you are personally responsible you have to include in income the cancelled debt up to the fair market value of the home, if you are not personally responsible you have to include the full amount of the cancelled debt. See pub 523 Selling Your Home p 5.

If cancelled debt is taxable, there might be an exclusion if you are bankrupt (7or 13) or insolvent. Pub 908 defines insolvency as your liabilities exceed you assets. You must file form 981 with your tax return, be careful, in the instructions it says that if you don’t file this form with your return, you can’t file an amended return if it is later than 6 month past the due date of the return without extensions.

If you think this is complicated, you don’t even want to think how business property or corporate bankruptcy complicates things

Answer 3

Yes it's true - the amount of debt that's cancelled is taxable income to you, at whatever your tax rate is. You'll get a 1099 for it from your lender at the end of the year. This isn't a new policy - cancellation of debt has by law been subject to tax for many years. You're just hearing about it more lately, since bad mortgages are in the news so much.

There are some exceptions, and if you are bankrupt or insolvent at the time of the foreclosure, you can be exempt from the tax on the cancelled debt.

And by the way, the IRS doesn't just come up with new policies on their own. Congress makes the laws and IRS writes the policies to conform with what Congress passes.

Answer 4

The bank didn't lose the money, you did.

I am assuming your house sold for less than what you owed on your mortgage(s). Now you owe the difference (called a deficiency). If, at some point in the future, the bank forgives your debt, would you not have gained from that? Other debtors that pay their debts must pay tax on their income and use the remainder to pay off their debts. There are thousands of those people also. Taxes, in this case, are equally unfair to both those who pay their debts and those who don't.

There is some relief for troubled debtors in the tax code. It is based on the theory that the discharge/cancellation/forgiveness of debt is only taxable if you are solvent AFTER the discharge, and only to the extent to which you are solvent. Seek professional help if you are fortunate enough to be forgiven of your personal debts.

Bankruptcy? If you flush everything with a Chapter 7 (liquidation), it's more likely that your cancellation of debt will not be taxable. Again, seek professional help.

Answer 5

So every time a person sells a house and makes a bundle, they should get to keep the gain, but every time a person loses a house the government should have to absorb the entire cost? In order to support a scheme like this, the taxes on those who actually make the money would have to be high enough to support those who lost money. there's a word for this - socialism. goodbye, bundle.

Answer 6

If your house if foreclosed on or your car repossessed or any debt canceled, you have Cancellation of Debt (COD) income. This is reported to you and IRS on 1099C.

It is reported on your 1040 on line 21 Miscellaneous Income.

If you filed for bankruptcy, then any debt discharged is not included in your income.

If it were not discharged in bankruptcy, then it could be included in income unless you were insolvent at the time of foreclosure or repossession.

President Bush had mentioned changing the laws involving COD income.

Answer 7

Yes.

For example: You owe $100,000 on your house and it is foreclosed on. The bank sells the house for $80,000. If it is a recourse loan (most are) and the bank forgives the $20,000 shortfall, the $20,000 is considered income to you and subject to income tax.

One caveat: If you are bankrupt or insolvent at the time of the debt forgiveness, you do not have to report the shortfall as income (see IRS Form 982).