Having your home foreclosed upon is a horrible thing. Not
only does it affect your credit negatively, but it can also leave you homeless
if you don’t have a backup plan or anywhere else to go! Because foreclosure is
so awful, you should absolutely do everything within your power to prevent it
from happening, even if it means taking out a loan, refinancing, or just
working out some kind of plan with your mortgage lender. If it’s past that
point, however, and your home has already been foreclosed on, then all you can
do is roll with the punches and follow our advice as to how to showcase this
information on your taxes.
The good news is that, in many cases, you can actually
exclude any “forgiven debt” from your income thanks to the recent Mortgage Forgiveness Debt Relief Act. Under this act, you can exclude any discharged
debt from your foreclosure, up to $2 million! There are, though, some
exceptions and rules that go along with this that you should be aware of:
l The
forgiven debt MUST be related to the foreclosure of your PRIMARY residence,
I.e. the home you actually live in or spend most of your time in
l The
debt must have been forgiven prior to January 1, 2017
l If
the above qualification is not met, the written agreement on the home must have
been entered into in 2016
If you’re feeling bummed because you don’t qualify to have
your debt excluded from your income, know that it is very likely that the act
will be extended, continuing your allowance. No one will know for sure, though,
until IRS laws are updated regarding this matter.
In any case, if you go through a foreclosure or any other
major change that affects your finances, it’s always good to check in with an
accountant and see how your taxes are affected and what you can do to mitigate
any damage.