How Does Foreclosure Affect Your Taxes?

How Does Foreclosure Affect Your TaxesSometimes, there are situations where you might no longer be able to afford your mortgage payment. Maybe you lost your job, which could make it difficult for you to keep up with your regular payments. Or, you may have taken out an adjustable-rate mortgage, and with recent rate increases, your mortgage payment might have gone up as well. Regardless, if you fall behind on your mortgage payments, you may be facing foreclosure action on the part of the lender. What does this mean for your taxes, and what do you need to know?

When Foreclosure Happens

First, it is important to understand when the lender has the legal right to pursue foreclosure. If you miss a mortgage payment, your lender isn’t going to immediately foreclose on you. You will receive a notice that you have fallen behind on your payments, and you need to take action as quickly as possible to rectify the situation. If you miss three mortgage payments in a row, most lenders will start to pursue the legal process known as foreclosure. You will receive a notice that the process is starting, and you need to prepare accordingly. Either you should pay your late mortgage payments, or you can renegotiate your loan with your lender. If your lender refuses to do so, your lender could foreclose on you.

How It Impacts Your Taxes

How foreclosure impacts your taxes depends on how the process unfolds. Typically, your lender will take your house and put it up for sale at an auction as quickly as possible. If the lender gets enough money to pay off the balance of your mortgage, you are entitled to the excess money. For example, if you still owed $250,000 on your mortgage, and the lender sells it for $350,000, you would be entitled to the excess $100,000. If this represents a capital gain on the sale of your house, you may still owe taxes on this money. It is important for you to work with the tax professional to clarify how this works.

A Possible Short Sale

Another possibility is that the lender faces the prospect of a short sale. This happens when the lender does not receive enough money to pay off the balance of the debt. For example, if you still owe $400,000, and the lender is only able to get $350,000 for the house, the lender will probably decide to cancel the remainder of the balance. This is not uncommon in the foreclosure process, but you would still have to pay taxes on the canceled debt. In this case, the lender will cancel $50,000 in debt, and you may have to pay taxes on it.

Possible Exclusions To Note

It is also possible that you might be entitled to an exclusion. Until the end of 2020, the Mortgage Forgiveness Debt Relief Act was in play. This means that if the lender decides to discharge your debt, and your mortgage was taken out during a time period that is impacted by this act, you might not need to pay taxes on the canceled debt. This is another issue that you need to talk about with a tax professional.

Work With a Tax Professional

Whenever you are talking about taxes, rules and regulations are complicated. The stakes are high, so you need to make sure you get it right. That is why working with an accountant is a good idea.

Furthermore, just because you are facing a foreclosure process doesn’t necessarily mean you can’t sell your house. Even if your lender has notified you that you are in foreclosure, we can help you.

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Do not wait for your house to go to auction. Instead, sell your house quickly to us. We are We Buy Dallas Houses, and we buy houses in the local DFW area. We can give you an all-cash offer for your house, helping you avoid closing expenses so you can get more out of your foreclosure property. Furthermore, we can help you move as quickly as possible because we don’t need to get any financing. Contact us today if you want to figure out how much your house is worth!

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