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The hot real estate market in the early part of this decade was fueled by easy to get, cheap money. Well, the inevitable backlash has occurred and foreclosures are skyrocketing. Most people don't realize a foreclosure can result in a big tax bill. The Internal Revenue Service looks at things in a strange manner. What you may see as a loss, it sees as a gain. The agency takes the view that any loss that relieves you of a financial obligation is actually a gain. Let's look at an example. 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. The IRS is very interested in that $200,000 mortgage debt. Why? How could I possibly get into tax trouble since it is a debt? Well, the agency takes the view that the relief from that debt can actually be considered 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! Watch the news for five minutes and you know what is going on in real estate. Values are down, interest rates are up and so are foreclosures. Thousands of peopel are running into this tax situation, even if they short sale their properties. Do you have any options if you find yourself in this situation. The best step you can take is to get an appraisal on your house. The tax you owe is based on the difference between the appraised value and your mortgage debt. 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. If all else fails, there is always the bankruptcy route. Although taxes generally are not terminated through bankruptcy, the "gain" you are perceived to have received is. Since there is no gain, there can be no tax and you are off the hook. Suffering through a foreclosure is absolutely no fun to say the least. Adding a potentially large tax bill to the process is even worse. As more people face this problem, one has to hope the IRS will change direction.
Article Source: http://www.philvault.com
Richard Chappoe is with BusinessTaxRecovery.com - come to terms with your back taxes today before the IRS catches up with you.
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