Dec 19, 2007

Tax Debt- Sub-prime mortgage fallout- Foreclosures and your taxes

NPR Marketplace Morning Report stated that there were over 200,000 home foreclosures in November, 2007, up 68% from November, 2006. It was projected at the gloomiest of outcomes, that there would be 1.4 million foreclosures in 2008. Given the November report, this projection does not seem so gloomy now- but rather optomistic.

Also, the Bush bailout and the Hillary Clinton response bailout does not seem to offer any more relief. The initial reactions annd commentary appear to state that neither will pass nor will they help.

The tax effect of the foreclosures are tremendous if a taxpayer is not insolvent, bankrupt, or it is not their primary residence. The IRS tries to give some help on this subject, but taxpayers do not really understand the ramifications. The bottom line is that the cancelled debt related to a foreclosure can be income to you.

If this is income, you may have a large tax debt bill at the end of the year. Because there is no withholding on this income (it is reported on a Form 1099-C), your tax debt can be large. Further complicating matters is the fact that you are probably financially strapped (hence the reason for the foreclosure). Possibly a currently not collectible status may be applicable. In any event, consulting a competent tax professional is needed.

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