A foreclosure is a traumatic event that no one should have to go through. However, if you are facing foreclosure or a foreclosure has already been initiated, you need to know how this incident is going to affect your personal income taxes.
You May Not Have To Pay Taxes on the Canceled Debt
When you foreclose on a home, it is considered a canceled debt. The canceled debt is considered to be income. However, you may not be required to pay taxes on this income. Under the Mortgage Debt Relief Act, if you meet certain qualifications, you may not have to pay taxes on this canceled debt. This act was extended to include foreclosures up until 2014. So you may still have to pay taxes on the canceled debt if your foreclosure happened after 2014. Check with your accountant or tax professional about this issue.
What Are The Requirements For The Mortgage Debt Relief Act?
Here are two requirements for the Mortgage Debt Relief Act. The property must have been your primary residence, so this wouldn’t apply to investment properties or vacation homes. And the amount of debt excluded had to be less than $2 million.
What If I Don’t Qualify For The Mortgage Debt Relief Act?
If you do not qualify for the Mortgage Debt Relief Act, you may have to pay the taxes on the canceled debt since it would be considered income. If you were personally liable for the entire mortgage, then you will have to report this on your taxes as ordinary income.
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