The nation is undergoing a wave of record home foreclosures. While the Asheville area is fairing better than many areas of the country, the problem remains all too real for many in the area. Unfortunately for foreclosure victims, the loss of a home is only one problem. In many cases, foreclosure means a potentially severe federal-tax liability. So it’s important to know what penalties apply — and what forms of relief are available.
In a bid to help, the Internal Revenue Service has unveiled a special new section on its Web site for people who have lost their homes due to foreclosure. The IRS also reassures homeowners that, although mortgage workouts and foreclosures can have tax consequences, special relief provisions can often reduce or eliminate the tax bite for financially strapped borrowers who lose their homes.
The new section of IRS.gov includes a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS. In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.
Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.
— Hal L. Millard, staff writer