How to avoid a tax bill following a foreclosure

What could be worse than the foreclosure of your home?

How about a whopper tax bill resulting from the “forgiveness” of the unpaid debt!

Following a foreclosure that does not recoup the value of the property being seized — pretty typical, in today’s housing market — the foreclosure will generate a 1099 for the difference between the loan balance and the lender’s opinion of what the house is worth.

Fortunately, there ways to avoid listing this 1099 on your income tax form. But you had better find one of these ways, because otherwise the amount on the 1099 is includable as income on your tax return. And no one wants that.

One of the loopholes is for “cancellation of debt due to a discharge in a Title 11 case.” Title 11, in turn, is shorthand for the federal bankruptcy code. In other words, if you file for bankruptcy, any deficiency from the loss of your home will NOT be counted as income on an income tax form!

This gives bankruptcy a massive advantage over dealing with debt settlement firms, which along with charging you higher rates for their services in the long run than most bankruptcy lawyers will, may also leave you with a massive tax-induced headache down the road.

 

By Doug Beaton

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