Foreclosure is a legal process where a mortgage lender or bank takes possession of a property because the property owner failed to make their monthly mortgage payments. Obviously, it is one of the worst things that can happen to anyone who owns a house. Many homeowners going through foreclosure have questions about the process and its consequences. And one of the most common is “How foreclosure will affect the taxes?” In this article, we are going to answer this question in detail, as well as explain how to avoid foreclosure.
What Are the Tax Implications of Foreclosure?
If you are going through foreclosure, it is normal that you are concerned about the tax implications. The implications depend on two factors: whether your property was repossessed after the foreclosure and whether your debt was wiped out (also known as cancellation of debt).
What Should You Know About Cancellation of Debt?
If you were liable for a mortgage loan, you may have cancellation of debt. You will receive a form 1099-C that will contain more detailed information. It should tell you the total amount of debt that you owed before the foreclosure, minus your home’s fair market value. The amount of debt you see is taxable income on your return unless you qualify for an exception. Here is a list of exceptions that make your cancellation of debt not taxable:
- Bankruptcy. Debts are not considered taxable if they have been discharged through bankruptcy.
- Insolvency. You are insolvent if your total debts exceed the fair market value of your total assets. Insolvency is quite complicated, so you may want to consult with a tax professional.
- Some farm debts. There are some farm debts that are not considered taxable.
- Nonrecourse loans. If you have a nonrecourse loan, the bank proceeds with foreclosure, sells your property, and that is the end of it. There is no legal action pursued against you.
How to Avoid Foreclosure?
Dealing with the tax implications after the foreclosure can be quite complicated and stressful. In order to avoid this, the best thing you can do is to prevent foreclosure from happening. Here is what you can do.
Consider a Repayment Plan
If you have missed a few monthly payments on your mortgage payments, the situation is probably not too critical, and you may be eligible for a repayment plan. With a repayment plan, you can arrange to make up the payments you have missed over time and remain current on your ongoing payments. Most repayment plans last three, six, or nine months.
Apply for a Loan Modification
A loan modification allows you to modify your current loan. With the help of the modification, you will be able to make your monthly payments more affordable so you can stay current on your mortgage loan and keep your property.
Conduct a Short Sale
If there is no option for you that would allow you to pay off your debt and remain in your home, you should consider a short sale. A short sale means that you sell your property for less than you owe on it. Your lender will receive the proceeds and forgive you the remaining balance. However, before pursuing a short sale, you need to get approval from your lender.
Sign a Deed in Lieu
Signing a deed in lieu is the process of transferring the ownership of your home to the lender voluntarily. In exchange, you are released from mortgage obligations. It is important to note though that a deed in lieu has a negative effect on your credit score that lasts four years.
Sell Your Home to a Cash Home Buyer
Another option to avoid or stop a foreclosure that many people do not know about is selling your home to a cash buyer. Cash Home Buyers purchase properties regardless of their conditions and circumstances. Therefore, foreclosure is not a problem for them. They buy homes immediately and pay cash. In addition, they do not even require any repairs or upgrades, as they buy properties as is.
If you are a homeowner with a property located in Pinellas County, Hillsborough County, Polk County, Hernando County, or Pasco County in Florida, and you are going through the foreclosure process, one of your best options to stop this process and avoid any tax implications discussed above is to sell it to KM home buyers.
We are one of the most reputable cash-buying companies in the Tampa Bay Area, and we buy houses in any condition and under any circumstances. If you want to sell your house fast, you should definitely contact KM Home Buyers because we are able to close on deals within two weeks. Do not hesitate to visit our website or give us a call if you have any questions.