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Foreclosures Lead to Tax Traps

By: Richard Chappoe..

Millions were made in the real estate market earlier this decade. Now, millions are being lost. The availability of easy money in the form of mortgages is reaping a bevy of foreclosures and their are major tax consequences to foreclosures.

You might say it is sunny outside. The IRS, however, would say there is simply a lack of darkness. The same goes with debt. The IRS views the waiver of a debt as a form of income to a taxpayer. Stay with me on this one.

Let's say I hypothetically purchased a home three years ago. I have a balloon loan on which I owe $400,000. Rates rise and I can't make the payments. Foreclosure proceeds get underway and I am eventually given the boot.

No credit. No home. No loans. No equity. Having your home foreclosed on is pretty much a total financial disaster and there is no getting around that fact. At least the worse is over, right? Nope. Now the IRS is taking an interest in you.

How could the IRS possibly be interested in me after a foreclosure? It all has to do with that mortgage. Remember how I owed $400,000? When the foreclosure occured, the debt was terminated. The IRS considers this a form of income to me.

Try to wrap your mind around that one. It can take a few efforts. Yes, the IRS views the foreclosure as though I have received a $200,000 salary for the year. You can guess what comes next. The agency wants me to pay taxes on it!

The golden days of real estate are over and many people are paying for overdoing it. Foreclosure rates are way up and going to climb. This means the position of the IRS is going to be a huge burden on people.

Do you have any way to fight off the IRS? Yep. You need to get a written valuation of your home before getting booted. Tax in this stuation is figured on the difference between what you owe and the objective price of the property.

In addition to the appraisal, you can make different arguments to the IRS. There are various approaches, but the basic idea is to suggest you received no gain and are insolvent. The IRS can then waive the tax liability.

As a final resort, you can look to the courts for protection. In this case, we are talking bankrupcty. The court can dismiss the underlying mortgage debt, which serves to terminate the tax due.

Only in America could we be talking about the financial disaster of going through a foreclosure and still have to consider taxes. It is ridiculous. Let's hope public pressure comes to bear and this policy is terminated.

Article Source: http://www.realestate2u.net/articledirectory

Richard Chappoe is with BusinessTaxRecovery.com - providing professional tax debt relief today from those unpaid taxes that have been following you.

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