FORECLOSURE CAN RESULT IN INCOME TAX BILLS

August 20, 2007

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For consumers who may fall behind on their housing payments as they rise out of reach with their adjustable-rate mortgages may receive another financial shock when they receive their tax bill from the Internal Revenue Service, theNew York Times reported yesterday. The 1099 shortfall, as it is called, stems from an IRS policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy. Foreclosure is one way that beleaguered homeowners can fall into this tax trap. The other is when homeowners are forced to sell their homes for less than the value of the mortgage. If the lender forgives that difference, they are liable for income taxes on that amount. Some people in this predicament are fighting the IRS and winning. Sometimes, lower payments can be negotiated with the IRS, tax experts say. Read more.

Foreclosure Can Result in Income Tax Bills