If I’m currently going through a foreclosure, how much my tax bill will be from the IRS once the process it complete?

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If I’m currently going through a foreclosure, how much my tax bill will be from the IRS once the process it complete?

Asked on November 18, 2011 under Real Estate Law, Ohio

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

In the past a foreclosure typically would have generated taxable income based on the amount that the sale proceeds were short of what was owed (i.e. deficiency).  The IRS treated forgiven debt as taxable income, subject to regular income tax.  However, pursuant to "The Mortgage Debt Relief Act of 2007", taxpayers are generally allowed to exclude income from the discharge of debt on their principal residence (investment property does not qualify).

Under the Act, debt that is forgiven in connection with a foreclosure, will qualify for this relief. The Act applies through years 2007-2012. Eligible for the exclusion is forgiven debt up to $2 million ($1 million if married filing separately). However, the exclusion doesn't apply if such debt is for services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. 

 Here is a link to the IRS site that will give further details:  http://www.irs.gov/individuals/article/0,,id=179414,00.html

At this point, you should consult with an accountant in your area for further information.


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