Financial Solutions of California | Helping You Expand Your Financial Possibilities™

These days, losses in the hundreds of thousands are being thrown around with ease in the real estate market. What once seemed like a smart thing to do is now unbearable. But if your only way out is foreclosure or a short sale, is the loss of your credit the only consequence? Depending on your particular situation, the pain may get worse.

In general, if the money you currently owe on your home was used to buy it, and not as cash out for your personal expenses, then chances are you are off the hook for the money from the bank. They will not be able to come after you for the difference. But when somebody loses, as far as the IRS is concerned, somebody else wins. It may not feel that way, but that somebody is you. And so the money the bank loses becomes money you made. Yesterday you owed it. Today you don’t. Feel richer already? Well, whether you do or not may be exactly what matters here.

You see, the IRS will consider the bank’s loss (the difference between the sale price of the home and what you owe them) to be income to you. If you have many investments and just decided this particular property was more hassle than it was worth, then you might very well be pleased to have it off your hands and pleased to not have to pay for the losses, even though you could probably come up with some way of paying it off, if you had to. If you fall in this category, then the IRS wants to share in your good fortune and you will have to pay your marginal tax rate on the debt that was forgiven.

However, if your misfortunes have truly left you in a bad spot, the IRS can waive the tax if you claim to be insolvent. That is, if you could not pay the debt off if you wanted to. Losing one’s home is a significant event. Don’t let the stress of the experience lead you to fail to seek advice on its consequences! Call us for a consultation.