We are in foreclosure, our house is underwater, will we be taxed on the difference?
Author: Rob K. Blake
Published: July 16, 2008
Here’s the question, then I’ll answer.
“We are in foreclosure and the lender will eventually get our house. We fell behind on the mortgage and didn’t make much of effort to save it since our mortgage balance was greater than the house was worth. My question is, will we be taxed on the difference?”
Tax Implications of Foreclosure
Under old tax laws the amount the lender “forgave” after selling your home at a loss would be consider income and taxed at personal income tax rates.
So the “old” answer was, “Yes”.
But under the new law, The Mortgage Cancellation Tax Relief Act of 2007 (HR 1876) signed on December 20, 2007, the rules changed to allow for a mortgage debt forgiveness as a NON-taxable event. You can read my post on this here, “Foreclosure Tax Reform Could Help Millions”.
So the “new” answer is, “No”.
I must say I am not a tax expert and every situation is different when it comes to the tax code. Please seek professional tax advice before making any decisions.
Great question!
Good Luck!
Author: Rob K. Blake
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