What are the tax consequences of a foreclosure?

When a foreclosure occurs in California, there can be serious tax consequences for the homeowner. Generally, the outstanding mortgage balance is considered income for the homeowner in the eyes of the Internal Revenue Service (IRS). If the total amount owed to the lender is greater than the current market value of the home, the homeowner may have to report this amount as “forgivable debt” on their tax return. If a loan modification or short sale is completed, the lender can often forgive some of the debt to avoid a foreclosure, and this forgiven debt must still be reported as income. In addition, California has one of the highest state tax rates in the nation. Homeowners may have to pay taxes on any forgiven debt or on any income they receive from the sale of the property. This can be a heavy financial burden and should be taken into consideration when deciding whether to go through with a foreclosure. Additionally, California law requires homeowners to pay back any loan deficiency balance due to the lender after the foreclosure. This amount must be paid back with interest and is often a significant sum. Homeowners should remember that they will still be responsible for this debt and plan accordingly. It is important for homeowners to keep these potential tax consequences in mind when considering a foreclosure. A qualified attorney or tax advisor can be very helpful in providing advice and information about how the foreclosure process may affect taxes.

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What are the tax consequences of a foreclosure?

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