What are the potential tax consequences of a foreclosure?

The potential tax consequences of a foreclosure in Texas depend on how the foreclosure is handled. Generally, foreclosure does not trigger any tax penalties or liabilities for the borrower. However, if the lender or servicer forgives part of or the entire mortgage debt, then the forgiven amount is taxable income for the borrower. This means the borrower may owe taxes on the amount of the debt relief, even though they received no actual money. In Texas, foreclosures can also result in cancellation of debt (COD) income. This means the borrower may be taxed on the difference between the amount owed to the lender and the amount received by the lender in a foreclosure sale. In addition, if the foreclosure is for a primary residence, the borrower may be subject to the Mortgage Debt Relief Act of 2007. This law allows taxpayers to exclude cancelled debt of up to $2 million for joint filers, or $1 million for single filers on their income tax returns. In some cases, borrowers may be able to claim deductions for foreclosure-related costs. These costs include legal fees and other costs associated with defending against the foreclosure. Finally, depending on the amount of the debt forgiven, there may be other tax consequences, such as an excess advance premium tax credit repayment or a decrease in the amount of taxes refunded by the IRS.

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What are the potential tax consequences of a foreclosure?

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