The IRS announced today that it has posted a special web section (www.irs.gov/newsroom/article/0,,id=174034,00.html) at its website for homeowners who lose their homes to foreclosure.
What many people don’t find out until it is too late is that selling your home for less than the amount you owe on the mortgage can cause you to pay a whole lot more tax next April 15th.
Here’s how it works: The IRS treats a “short sale” as phantom income. So, if you owe $100,000 on your mortgage but sell your home for $80,000, that missing $20,000 ($100,000-$80,000) is treated as income by the IRS. So, you would then owe income tax on the missing $20,000 as if you had earned it in your job.
When President Bush talked about offering some tax relief to the millions of homeowners facing foreclosure, it was unclear what was going to be done. According to the IRS, new special relief provisions can reduce or eliminate the tax bite for financially strapped homeowners who lose their property.
According to the IRS news brief, “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.
“The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.
“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.
“The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.
“Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property’s fair market value, it may not necessarily reflect its true value in some cases.
“The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender immediately if any of the information shown on their form is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).
“The IRS also reminds lenders of their obligation to provide accurate information on the Form 1099-C. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.
“The IRS normally initiates these follow-up contacts by sending the borrower a notice. The tax agency urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.”
Check out this link for more information: www.irs.gov/newsroom/article/0,,id=174034,00.html
Questions and Answers on Home Foreclosure and Debt Cancellation.
You may also be interested in the following IRS Publications:
www.irs.gov/pub/irs-pdf/p523.pdf Publication 523, Selling Your Home
www.irs.gov/pub/irs-pdf/p544.pdf Publication 544, Sales and Other Dispositions of Assets
www.irs.gov/pub/irs-pdf/p908.pdf Publication 908, Bankruptcy Tax Guide
www.irs.gov/pub/irs-pdf/f1040.pdf Form 1040, U.S. Individual Income Tax Return
www.irs.gov/pub/irs-pdf/f1040sd.pdf Form 1040, Schedule D, Capital Gains and Losses
www.irs.gov/pub/irs-pdf/f1099c.pdf Form 1099-C, Cancellation of Debt
www.irs.gov/pub/irs-pdf/f9465.pdf Form 9465, Installment Agreement Request
Sept. 18, 2007.