First Foreclosure And Then A Notice From The I.R.S.

Agnes Mouser of Texas is a 65-year-old widow, who got a $10,000 tax due bill after foreclosure on her loan to settle credit-card debt.

First foreclosure, and then the series of monetary problems associated with it, are increasing day by day all over the country. For instance, the burden of tax comes as a complimentary package along with foreclosure. It is very likely for the owner of a foreclosed property to fall into a tax trap without realizing it. Only good negotiation skills or bankruptcy can save the owner from this tax trap.

The system works something like this. First, the unpaid tax amount keeps on multiplying on mortgage payments you default on. Secondly, if the owner opts for selling the house at a lesser value than the actual debt amount owed, and the lender excuses this difference, then the owner becomes liable to pay the outstanding tax on the difference amount that he or she owes.

The Internal Revenue Service’s (I.R.S) policy considers excused debt of all types as an income for the owner. This excused income falls under the tax bracket even if the owner has no tangible property or asset to show for it. Only in cases of bankruptcy does the I.R.S. cancel the debt. In such cases, the onus to prove their insolvency lies solely on the owner.

During the boom in the real estate market, some of the lenders and brokers deliberately encouraged people to take more loan amounts than they could afford. Therefore, if the lawyer of the house owner proves that the process of the loan agreement was faulty, then I.R.S does not treat the forgiven amount as an income. Many people have been able to reduce their tax burden in such cases.

The “Center for Responsible Lending” in Durham, N.C. projects about 21 percent failure in home loans extended during 2005 and 2006. All of these loans will probably turn out into foreclosure. These loans were nothing but sub-prime loans given to people with weak credit profile. The value of many of the houses on which loans were taken is generally lower than the owed amount since the down payments were very low.

The owners can also negotiate lower payments with the I.R.S. However, the outcome is not favorable for everyone since the I.R.S. ultimately decides the tax amount to be paid.

Actually, the truth is that the legalese of the tax paper is very difficult for a non-professional to understand. Therefore, it is always advisable to consult a tax advisor in this kind of situation, or it can end up causing some one a lot of grief.

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