What happens to your taxes if you lose your home to foreclosure? After you hit a recession, you can be informed about the threat and what you can do about it. Bruce Bell, Attorney at Chicago Office Schoenberg Finkel Biedermann Bell Glaserthere are some answers:
Larry Wright: Let’s say you have a daughter like Mortgage payments are severely overdue and her house is at risk of being lost through foreclosure. Does she have to pay taxes on the outstanding mortgage balance?
Bruce Bell: A general tax principle is that if a taxpayer’s debt is forgiven or discharged, the taxpayer must report the profit and pay the tax on the outstanding debt. However, there are some applicable exceptions that taxpayers can take advantage of to avoid paying taxes in these circumstances.
Under a temporary federal tax law enacted in 2007 and now extended through 2025, taxpayers with qualifying personal residential debt, known as QPRI, are eligible for mortgage forgiven or forgiven debt. You don’t have to pay taxes. QPRI is the liability used to obtain the taxpayer’s principal residence and is $750,000 for married couples and individuals who file joint income tax returns, and for married couples who file income tax returns separately from their spouses. Limited to $375,000 for taxpayers.
The debt must have been incurred to acquire, build or improve the home and must be secured by the home. Debt incurred to refinance the original acquisition debt also qualifies for QPRI with some modifications.
light: like what?
Bell: There are various obstacles. A debt-forgiveness residence must be the taxpayer’s primary residence. Debt forgiveness for vacation homes and other real estate properties is not eligible for QPRI. Taxpayers are required to comply with his QPRI rules for refinanced debt if the amount of debt refinanced exceeds the sum of the debt used to acquire the home and the debt incurred to build or improve the home. It should be noted that does not apply to
light: Let’s take an example.
Bell: Suppose Glen borrows $200,000 to purchase a primary residence, then refinances the original debt with a $300,000 loan, and uses the excess loan proceeds to pay for college tuition and other non-housing-related expenses. increase. In this case, if Glenn’s entire debt is forgiven through foreclosure or other arrangement between Glenn and the lender, a portion of the forgiven debt is excluded from income as QPRI, but a portion of the proceeds from the refinancing. was used, some of which is taxable. Expenses other than accommodation.
If many taxpayers have refinanced their mortgages and are only using the surplus funds to improve their homes, the debt that has been discharged could be considered fully QPRI. A person in this situation should keep accurate records establishing the application of refinancing proceeds to home improvement costs in case the IRS challenges his QPRI eligibility for a portion of the indemnity liability. must hold.
Tracking home repair costs is important for other reasons as well. Also, the amount of that expense could increase the home taxpayer’s threshold and affect the taxation of any gains you may need to report on the sale of your home.
light: QPRI is not just limited to foreclosures, is it?
Bell: Homeowners often work with lenders in so-called short sales, transferring the outstanding mortgage balance to the lender in full satisfaction even if the home is worth less than the outstanding mortgage balance. Second, QPRI rules allow the exclusion of fully exempt debts from the taxpayer’s taxable income, as if the house had been lost through foreclosure.
Another common exception to the taxability of debt forgiveness income is bankruptcy forgiveness. Taxpayers whose debts have been discharged while insolvent are not required to report the discharged debts as income to the extent of their insolvency. There are some other intricacies to this convention that must be considered.
In this example, there are a number of avenues available to my daughter to avoid taxable gains during the most unhappy times of her life. Careful consideration of applicable tax rules can reduce taxation.