The IRS viewpoints any debt payable by a creditor –which frequently takes place when a foreclosure sale does not pay for the mortgage balance–as taxable income. Any capital gains on the foreclosure sale price may also be taxed–whether the selling of the house covers the debts secured on it or not. Happily for debtors, the government offers tax breaks for those who have lost their home due to a foreclosure, in addition to those looking to buy foreclosed houses.
The Mortgage Debt Relief Act of 2007
The Mortgage Debt Relief Act of 2007 provides a tax break for borrowers whose debts have been completely, or partially, forgiven. Ordinarily, any forgiven debt is taxable, but under the 2007 Mortgage Forgiven Debt Relief Act individuals with mortgages of around $1 million, or $2 million if filing for a couple, may exclude”income” generated by debt forgiven in their principal residence. Foreclosures on secondary houses, such as vacation houses, are still subject to taxes, according to the IRS. Of course, this tax break only applies to federal taxes, individual states can still tax forgiven debt from a foreclosure.
State Tax Breaks
Some states are also choosing to offer tax breaks on the country portion of taxes on forgiven mortgage debt. For instance, California passed a bill in 2010 forgiving country taxes on foreclosures and short sales. Check with your state authorities to see what state tax breaks are available.
Tax Breaks To Buy Foreclosures
The Foreclosure Protection Act of 2008 provides individuals who buy a foreclosure with up to $7,000 in tax credits, which can be maintained over two decades. According to the Foreclosure Protection Act foreclosed houses reduce the value of surrounding properties. The point is to provide buyers with an excess incentive to buy foreclosed homes to revive home values for many homeowners.