Foreclosure Tax Relief Available to Many

The IRS unveiled a new section of their website today that is dedicated to Foreclosure Tax Planning those who have lost their homes due to foreclosure. They are also reassuring homeowners that there are special relief provisions which can often reduce or eliminate the tax bite for financially strapped borrowers who lose their home. As you may be aware of, some mortgage workouts and foreclosures can have tax consequences and these provisions will help keep the burden to a minimum.


The section includes a worksheet designed to help borrowers determine whether or not any foreclosure related relief provisions apply to them. If a homeowner finds they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS or even settle their tax debt for pennies on the dollar using an offer-in-compromise.


Under tax law, any debt that is wiped out through foreclosure (or a short sale) that exceeds the value of the property, the difference in considered taxable income. The IRS urges homeowners to consider their options carefully before giving up their homes.


There is a special rule that allows insolvent borrowers to offset income to the extent their liabilities exceed their assets. However, under tax law, relief may be limited or unavailable due in some situations such as using part or all of a home for business or rented out.


Homeowners who have debt reduced or eliminated will receive a From 1099-C from their lender. By law, the form will show the amount of debt forgiven and the fair market value of the property. Keep in mind that the winning bid at a foreclosure auction may not reflect the true value of the property.


If you receive a 1099-C, review it carefully and notify the lender immediately of any incorrect information. Pat particular attention to Boxes 2 and 7 as they are the amounts forgiven and fair market value.


Also, if you are facing foreclosure or have already been foreclosed upon, don't wait until the end of the year to start tax planning. Visit the www.irs.gov now or consult an accounting professional and start researching your options.