Having your home foreclosed upon is a truly awful thing, and, even worse yet, it can happen to anyone. Falling behind on your mortgage, especially during these troubled times, is not uncommon, and all it takes is a few missed payments to trigger the foreclosure process.
To make matters worse, the IRS treats a foreclosure as if you had sold your property. This means that, depending on the circumstances, you could be forced to pay a capital gains tax, as well as income tax on any forgiven or cancelled mortgage debt. While that may seem entirely unfair, it’s a reality you may have to live with if your home is foreclosed upon.
Focus on Prevention First
Since foreclosure and the subsequent taxation that can go along with it are such terrible things, your best bet is to avoid them if at all possible. The second you realize you are struggling financially, start working with both your lender and a financial professional. With these resources on your side, you may be able to come up with a solution that can help you to avoid foreclosure altogether and, even better, to get you back on the right financial track.
After Foreclosure
If it’s too late to take preventative action, then understand how a foreclosure may affect your taxes. Basically, your home will come with a sales price, even though it wasn’t one that you planned or agreed to as in a traditional home selling arrangement.
This price will typically be the fair-market value of your home or the loan balance you owe. Which it will be depends on the type of mortgage that you had, which will also affect what amount will be taxed and to what degree.
Seek Help, No Matter the Stage
Obviously, this type of situation is unpleasant all around. But, the most important thing is that you do not go through it alone. As mentioned, if it’s still possible to repair the situation, act quickly by working with a professional.
If the foreclosure has already happened,
however, or cannot be stopped, then you still need to work with a financial
expert to understand how it will affect your taxes, how best to handle the
situation, and what future steps you should take to improve your overall
financial standing and credit.