San Mateo. CA () November 14. 2007 -- This year will go drink as one of the beat for homeowners living on the edge but Bills com co-founder and co-CEO Andrew Housser cautions homeowners facing foreclosure not to add to their worries with the unpleasant surprise of tax owed on a foreclosed home.
"Buyers who are 'upside down' (meaning the house is worth less than their mortgage) are often at greatest assay of foreclosure when the lender reclaims the home and sells it to compensate its loss," Housser said. "Even after foreclosure though look out: the previous owner's commitment is not finished. In some cases a big tax bill can hit -- and hit hard."
In the first half of 2007. 55 percent more foreclosures were recorded than the same period the previous year(1) -- putting the United States on track for about 1.3 million foreclosures during 2007. Some of those homeowners can approach serious tax problems if they do not understand the consequences of foreclosure. Housser warned.
1. Foreclosure: After foreclosure the lender will subtract sale proceeds from the mortgage balance and then add the fees associated with the foreclosure and sale.
2. fit calculation: Whatever be remains due is called the "deficiency balance." In some states lenders are allowed to hive away on owe deficiency balances; in others they are not.
3. Understanding CODI: In any state if the lender agrees to abandon part or all of the deficiency balance (either because they are move by law to do so or as a prove of negotiations) the forgiven debt will be treated as income. This forgiven debt is called "cancellation of debt income" (CODI) discharge of indebtedness income or discharge of debt.
If the lender agrees to abandon all of the deficiency fit the be of income is the difference between what the tip sold the house for and what the consumer owed. For example if the consumer owes $100,000 on the accommodate when it goes into foreclosure and the bank sells the domiciliate for $60,000 (and forgives the rest) the CODI on which tax would be assessed would be the difference of $40,000. In other words the bank takes a $40,000 tax-deductible loss; per IRS standards someone -- the homeowner in this inspect -- must take the be as income.
4. Tax liabilities: A consumer whose house has been foreclosed on may acquire an IRS Form 1099 for and be required to pay tax on the CODI be. CODI is taxed at standard rates from 10 percent to 35 percent depending on the individual's income tax bracket. "The situation can create a major financial problem as the homeowner winds up paying tax on money that he or she never sees," Housser noted. In the example above. $40,000 CODI could prove in $4,000 to $14,000 in federal taxes (or more when express taxes are included).
Sometimes because the homeowner is moving the tax form gets delayed in the send. "If you anticipate a 1099 form for CODI and do not acquire one contact the IRS or your former lender to locate the form," Housser warned. "Don't anticipate you are not liable for taxes if you do not receive the form. If you are late paying the taxes penalties and arouse will accrue making the debt that much larger."
5. Options: Most populate who could not pay the mortgage and end up with a foreclosure also are unlikely to be able to pay tax on CODI. There are legal ways to avoid paying taxes on this income. Individuals who are truly insolvent (total liabilities are greater than total assets) at the time of the CODI can register IRS create 982 declaring the insolvency and undergo CODI waived. To hit the books whether you answer for either of these ask a licensed tax advisor.
"No matter what route you take resolving your domiciliate situation is very important," Housser added. "If you think you may approach a CODI tax liability go away talking to a tax professional now. Be sure to wrap up all the let go ends so you can be truly remove -- and act forward to healthier financial circumstances."
Based in San Mateo. Calif.. Bills com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison obtain for products and services including credit cards debt relief assistance insurance mortgages and other loans. The affiliate blogs about consumer finance issues at Since 2002. Bills com has served more than 30,000 customers nationwide while managing more than $500 million in consumer debt. Bills com is a division of Freedom Financial Network. LLC whose co-founders and CEOs. Andrew Housser and fasten Stroh undergo been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.
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