Capital Gains and Foreclosure
In some states you are forgiven any further debt on the house when you are foreclosed on.
Sell House Fast – Arlington VA: Foreclosure may or may not affect your need to satisfy the capital gains tax liability. The general rule is that you don’t pay taxes on the foreclosure itself, but if you were forgiven part of the loan you may be liable to pay taxes on that as income. The laws regarding capital gains and foreclosure are complex. You will need to check in your state to find the specific set of laws that apply there. In any case you should report any forgiven debt when you do your taxes.
Capital gains taxes apply to the profits made on a sale of an asset, usually property. Where you sell for less than what you owe, you may receive a capital loss, which can be deducted in most cases. That would apply to investment property only, not for individual primary homes. In that case, you can take up to $3,000 of your capital gains losses off of your income.
Since foreclosures aren’t sold at a profit, you should not be liable for any capital gains taxes. If your foreclosed property was investment property and sold for less than the value, you can record the loss amount from your income and call it capital loss. In the event the house is your personal home, however, there will be no capital loss. This rule also applies to vacation homes, which are not eligible for capital losses, either.
“Since foreclosures aren’t sold at a profit, you should not be liable for any capital gains taxes.”
The IRS has its own set of rules for capital gains. If you take out a mortgage and don’t repay it or a portion of it, the IRS considers the amount you didn’t repay as income. For example, let’s say you take out a $450k loan and get the balance down to $275k before you go into foreclosure. The IRS could count that $175k in additional unpaid mortgage as income to you. The criteria for this liability are whether or not you have a recourse or nonrecourse loan.
In a nonrecourse loan you are not responsible to repay it, so the taxation will not apply. If your loan is a recourse loan, you will be responsible for the repayment of the loan and will be taxed on the forgiven part of the debt. In some states you are forgiven any further debt on the house when you are foreclosed on, but in other states you are absolutely responsible whether foreclosed on or not. Check your paperwork to find the wording you need so you’ll know your tax liabilities in foreclosure situations.
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