Tax Issues Related To Foreclosure

We are seeing that a large number of homeowners are losing their homes in the foreclosure, for first time in generally more than thirteen years. As a matter of fact, as reported recently in North County Times, the California state is leading the nation with the total foreclosure filings that have been taking place during last quarter. It has been showing literally as many as about one filing in every eighty eight households. To top all these you will be burdened with loads of financial stress that will be pricking you when you are probably going through all this. However, there are some very complicated tax consequences which have to be dealt with.

Essentially, each and every foreclosure is treated in terms of sale for the tax purposes. Generally, the 1099 form normally will be issued which is also reported to IRS. It shows the gross proceedings of the sale. Then, there are also a few escrows closing statement that are produced, that clearly shows the combined value at which the said house had been transferred to lender. Usually this closing statement generally includes all the unpaid taxes as well as interest which have been accrued, and also the balance of loan at the particular point of transfer. But, as a seller, you generally total all these “credits” and then report this particular amount as sales price of the property.

However, the immediate concern has to be in determining if there are any taxable gains present or not. Even though most of the rules which relates to sale of personal residence have been changed way back in 1997, most of the tax payers are not even aware of the procedure to be followed in applying these rules. It is not necessary to purchase another home or to be aged more then 55 to exclude any gain. The most crucial point is that you will have to own as well as live at your home for any two years out of the total previous five years.

But, even this newest two-year rule has the chances of being bent a little bit if you wish to sell because of any job change or even if you have any other unusual circumstances. However, losing financial ability in maintaining the property has always been found among such unusual circumstance. The homeowners who have lost their homes in the foreclosure must be able to lose up to the extent of $500,000 in the form of gain if they are married as well as $250,000 if they are single. Sadly, the capital losses that are resulting from sale of the home are not always deductible.

However unfortunately, in the environment that consists of rising prices of homes and frequent refinancing for the homes, it is therefore possible to have some gain from the foreclosure which by far exceeds the excluded amount of gains that are discussed above. The $500,000 is generally not a huge amount of money it once was, as well as limits has also not been modified for inflation.

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