"Kevin McCormally's Tax Tips"-Foreclosure Options
Monday, March 24, 2008SUSIE GHARIB: Time now for our tax tips series. Every Monday between now and April 15, we'll try to help you prepare your tax return. Tonight, our tax guru Kevin McCormally, executive editor at "Kiplinger's Personal Finance" has advice for people who are facing foreclosure.
KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tonight I want to talk about people who have lost their homes or who are threatened by foreclosure. You know, the latest statistics show that nearly one million home mortgages are in the foreclosure process right now. What's this have to do with taxes? Actually quite a lot, because the tax law contains a time bomb for foreclosure victims. You see, if the bank forecloses and sells your home for less than you owe -- and forgives the rest of the mortgage -- the amount forgiven is treated as taxable income to you. You see as far as the IRS is concerned, money you couldn't afford to pay back is treated as though it was paid to you.
The IRS even has a special form for reporting this windfall, the 1099- C. The "C" stands for cancellation of debt and you can also wind up with this phantom income if a lender restructures a loan to help you keep your home. Now, late last year, Congress passed emergency legislation to waive this tax for folks who lost their homes or had debt forgiven in a restructuring in 2007, 2008 and 2009. This is a big deal. The three-year break will save affected taxpayers some $600 million.
But note this: the relief only applies to owners who lose their primary residences. If you lost a vacation home or an investment property to foreclosure, forgiven debt is still considered taxable income to you, unless you were in bankruptcy or insolvent. And beware that even if you qualify for this break, the lender will still send you a 1099-C form. It will be up to you to know whether the discharged debt is taxable or tax- free. Be careful. I'm Kevin McCormally.
