Foreclosure is every homeowner’s greatest nightmare. If the economic downfall from the COVID-19 persists, many people risk losing the roof from over their heads. As if this isn’t enough, they might face some foreclosure tax implications.
Luckily for many, two government-sponsored lenders, Freddie Mac and Fannie Mae, extended their foreclosure moratoriums until at least the end of 2020, instead of August 31st. This gives all homeowners several more months of relief.
In July 2020, the number of foreclosures went down 83% compared to the same period of last year. This is all thanks to the CARES act and its protection. However, as the number of unemployment keeps on rising, this number is expected to blow up in 2021. This will also leave many people with foreclosure tax implications.
What Foreclosure Tax Implications Are You Facing?
Typically, if you’re in default with your creditor but you reach a deal and resolve it with less money, the forgiven amount is considered taxable income. For example, you’re $10.000 in debt on your credit card, but you can’t pay the entire sum. Instead, your lender agreed to let you go after you’ve paid $7,000. This means now you have $3,000 of taxable income, as this is the amount of debt you’ve been forgiven.
However, this is a little bit different when it comes to your foreclosure tax implications. If you are married, and your primary residence ends up foreclosed, you may exclude up to $2 million of the cancelled debt thanks to the qualified principal residence indebtedness exclusion. Sounds great? Well, you should keep in mind that this is just a temporary provision that should be renewed by Congress by the end of 2020. If this exclusion isn’t extended, you’re facing a big problem. Once this exclusion is ruled out, you will likely get a Form 1099-C from your lender, which will state just how much was forgiven and how much you own on foreclosure tax implications. In other words, even though homeowners have lost their home, they might still owe money to the IRS.
Contact Your Tax Professional
If these tax implications worry you, you should work with your tax professional to help you understand scenarios in which a debt cancellation might be excluded. Some of these include insolvency and bankruptcy. However, claiming insolvency requires accounting all of your liabilities and assets. This is why it’s the best to try to work with your lender and try to find a way to get out of this situation.
Can You Prevent Foreclosure?
The best way to save yourself from foreclosure tax implications is to prevent foreclosure altogether. Often times, you will be given the chance to work with your lender on creating a good repayment plan. For example, you might be given the opportunity to pay one or few additional months of your mortgage to pay off what you owe, or you might pay a bit higher mortgage in the future. All of these options, however, require you to find a way to get the funds.
If you know that there is no way to collect the money on time, the best option you can have is to make a quick sale of your home and repay your debt this way.
Should I Sell My House to Stop Foreclosure?
A short sale can be a smart way to prevent foreclosure on a mortgage. Although they can be difficult to attain in today’s market, they often prove to be a simpler way to resolve any debt left over from a loan. Short sales were really common in the market a couple years back when the flood of foreclosures hit the Milwaukee market, but as foreclosures have slowed down and home values have climbed back up a bit, lenders are a little less likely to offer a short sale as an option as they used to be. This, however, might change in the after effect of COVID-19 pandemic.
You’ll have bigger chances of your short sale being approved if you work with a reliable direct buyer who can guarantee being able to make payments – such as Sparks Property Investors LLC. If you work with us and your tax professional, you may be able to get out of any foreclosure tax implications you risk facing. Not just that, but we may be able to get you out of your mortgage.
We buy Milwaukee properties and we work with people who are facing debt and mortgage problems. In these occasions, many people won’t be able to sell their house traditional way, which is why we come in handy.
If you don’t know who to contact or where to turn to see if a short sale may be a good option for you, get a hold of us. We won’t charge a thing to discuss your situation with you and let you know your options. We can even give you guidance and pointers at absolutely no cost or obligation. And if we agree on a house sale, we can often close in just a week! This is the best option for getting out of foreclosure and saving your credit report.