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Tax Consequences of Foreclosure

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With tax season in full swing, many debtors with a potential foreclosure judgment on the horizon may be questioning what the tax implications of foreclosure actually are. While it is usually understood that a foreclosure will affect one’s credit score, the potential tax repercussions that may accompany one are less known.

Our Miami foreclosure defense attorneys are sharing some insight so that those who have undergone a foreclosure in Florida or may in the near future, can be prepared.

Capital Gains & Losses

When it comes to tax law, a foreclosure is not much different than if the debtor had sold the home on their own. This refers to whether the sale could bring either a capital gain or a capital loss. This is determined by comparing the sold price to the original sale price, which would either be the property’s fair market value or the amount still due on the loan. If the sale produced more than the original sale price, it would be treated as a capital gain and the debtor will be taxed on the difference. That said, in the event that the sale is a loss, the debtor would not be able to deduct the difference from his or her taxable income. Depending on the circumstances, the debtor may be able to exclude up to $250,000 of the gains if filing independently, or $500,000 if filing jointly. These exclusions, as well as any applicable foreclosure alternatives, should be carefully explored with an attorney.

Debt Forgiveness or Cancellation

Another key consideration is whether or not one’s remaining debt is cancelled. If an individual holds a traditional recourse loan and the sale does not satisfy the remaining balance of the mortgage, the lender may cancel or forgive the remainder of the debt. Whatever is forgiven or cancelled would be classified under tax law as income, and would therefore be taxable. Some forgiven debts may qualify to be excluded from one’s tax return if he or she is determined to be insolvent, meaning their debts are greater than the value of their assets. Additionally, if the debtor held a non-recourse mortgage, the lender would consider the sale price a full repayment of the balance, even if it did not total more than what was owed. All potential exclusions should be carefully explored with an attorney to ensure the borrower is not being unnecessarily taxed due to a foreclosure judgment.

Are you falling behind on mortgage payments and looking to learn more about your options? Our Miami foreclosure defense attorneys are here to offer authentic guidance on your unique situation. Contact our office today to schedule a free consultation.

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