If you think that the bank taking your house back gives you a free ride, think again. You did not escape the money you owed, guess what, it is now taxable by the federal government, otherwise known as the Internal Revenue Service. You still owe some money, so be careful.
Many homeowners bought their house under creative financing terms such as interest only and variable rate loans. With the recent shakedown of the mortgage industry and rates adjusting, it can be a recipe for disaster for homeowners. You can owe the IRS in one of two ways, which we will discuss in detail.
The difference between what you owe on your mortgage and what the bank has to sell it for is called a short sale. Short sales are becoming widespread as many people are losing their homes to foreclosure. The difference in the two numbers is usually taxable.
The Internal Revenue Service considers any loan amount forgiven as cancellation of debt and is taxable as regular income. The Internal Revenue Service says that debt discharge or cancellation is fully taxable as regular income. Homeowners really need to be aware of this before they consider foreclosure.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
Any debt that was owed beyond what had been paid is considered to be cancellation of debt, and is always taxable by the Internal Revenue Service. Many homeowners have been given bad advice and think that discharge or cancellation of debt by the bank entitles them to a free gift that is not taxable, this is not the case and discharged debt is taxable.
The tax consquences should always be considered when turning your keys back into the bank, it is never as easy as it seems, and homeowners could potentially get a huge tax bill at the end of the year if they are not careful.
Many homeowners bought their house under creative financing terms such as interest only and variable rate loans. With the recent shakedown of the mortgage industry and rates adjusting, it can be a recipe for disaster for homeowners. You can owe the IRS in one of two ways, which we will discuss in detail.
The difference between what you owe on your mortgage and what the bank has to sell it for is called a short sale. Short sales are becoming widespread as many people are losing their homes to foreclosure. The difference in the two numbers is usually taxable.
The Internal Revenue Service considers any loan amount forgiven as cancellation of debt and is taxable as regular income. The Internal Revenue Service says that debt discharge or cancellation is fully taxable as regular income. Homeowners really need to be aware of this before they consider foreclosure.
The tax rate can be as high as 35% depending on the tax bracket that the homeowner falls in. Tax law directs homeowners to actually sell their home back to the bank which the proceeds will go to their debt. The actual tax rate could be as low as 10%, but again it depends on your tax bracket the amount that the homeowner will owe at tax time.
Any debt that was owed beyond what had been paid is considered to be cancellation of debt, and is always taxable by the Internal Revenue Service. Many homeowners have been given bad advice and think that discharge or cancellation of debt by the bank entitles them to a free gift that is not taxable, this is not the case and discharged debt is taxable.
The tax consquences should always be considered when turning your keys back into the bank, it is never as easy as it seems, and homeowners could potentially get a huge tax bill at the end of the year if they are not careful.
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