There are a few tax implications involved in the foreclosure of a home. For help with your situation, seek assistance with your tax professional FIRST and then a Fort Lauderdale foreclosure attorney.
When you are facing a mortgage foreclosure in Florida, there are tax implications of which you should be aware. For investors or homeowners it could mean serious financial consequences, but there may be some relief available.
The Mortgage Forgiveness Debt Relief Act of 2007
This act passed by Congress can prevent tax consequences for certain owners whose homes are in foreclosure. Homeowners facing financial difficulty may find that alleviating this tax concern may help significantly.
In general, if you lost your home in foreclosure or through a short sale, the discharged amount is taxable income. There are some exceptions, however. For instance, it does not apply to a non-recourse loan, where a mortgage company’s only option is to repossess your home or use it as collateral.
Other exceptions include bankruptcy and insolvency. Insolvency is when the fair market value of your assets is less than the total of your debts. This is a bit more complicated, so you will likely require a professional to help figure out if this exception applies to you.
If you do not have a non-recourse loan, then your debt income is taxable. What’s more, if there are reportable earnings from the sale of your home, this may also be taxable.
Determining Income to be Reported Stemming from a Foreclosure
Discharge of indebtedness income (DOI) is generally reported to the IRS by the taxpayer. The lender will provide the appropriate form for this: Form 1099-C. As a taxpayer, whether or not you receive a 1099-C from the lender, you must disclose DOI to the IRS.
The first step is to figure out the cancellation of debt income. You will first submit the entire amount of your debt before the foreclosure. From Form 1099-C, box 7, you will submit the equitable market worth of your home. Subtract the value of your home from your debt before foreclosure. Generally the value that is determined with this formula is the same as what is found in the Form1099-C, box 2. This is your taxable income. If you meet one of the exceptions, you will submit it on Form 1040, line 21, Other Income.
The second step is to figure out the gain from the foreclosure by entering the equitable market worth of your foreclosed home. If this is a non-recourse loan, you will enter the debt amount before the foreclosure. You will then enter the modified basis in the home. This is generally the purchase price in addition to any costs for major home improvements. Now, subtract the modified basis of your home from the fair value of your home. This will show the gain from your home’s foreclosure.
There are exclusions that may apply and you definitely need to contact your tax professional since even the most experienced foreclosure lawyer is not licensed to give tax advice. For instance, if you owned the home and it was your primary home for at least 2 years during the 5 year period ending on your foreclosure date, you can eliminate a maximum of $250,000 from income.
If you file a joint return as a married couple, the amount excluded is $500,000. If your gain is greater than $250,000 or you do not qualify, you must reveal the taxable amount on Schedule D, Capital Gains and Losses.
The tax implications are just one complicated component a homeowner has to deal with when facing a foreclosure. A Fort Lauderdale foreclosure attorney may be able to help.
For assistance in determining if there are other options, contact an attorney at The Neustein Law Group, P.A. Our law firm serves residents of Miami-Dade County, Broward County, and Palm Beach County and other areas throughout Florida. We may be able to provide alternatives that prevent a foreclosure. Contact us today directly at (305)531-2545 (Direct) or 888-400-ATTY (2889) (Toll Free).