| For the first time in more than 13 years, we are seeing | | | | to be such an unusual circumstance, homeowners |
| an increasing number of homeowners lose their | | | | who lose their homes to foreclosure should be able to |
| homes in foreclosure. In fact, as recently reported in | | | | exclude up to $500,000 in gain if married and $250,000 |
| the North County Times, California led the nation in total | | | | if single. |
| foreclosure filings during the last quarter, showing as | | | | Sadly, capital losses resulting from the sale of your |
| many as one filing for every 88 households. On top of | | | | home are not deductible. |
| all the financial stresses hitting you if you are going | | | | Unfortunately, in an environment of rising home prices |
| through this, there are some complicated tax | | | | and frequent refinancing, it is possible to have a gain |
| consequences to deal with. | | | | from foreclosure that far exceeds the excludible gains |
| Essentially, a foreclosure is treated as a sale for tax | | | | discussed above ---- $500,000 is not as much as it |
| purposes. Usually, a 1099 form will be issued to you | | | | once was, and the limits have not been adjusted for |
| and reported to the IRS, showing the gross proceeds | | | | inflation. To make sure you don't pay unnecessary |
| of the sale. There is also an escrow closing statement | | | | taxes when you sell, it is important for you to keep |
| produced, which shows the total value for which the | | | | track of the "basis," which is, generally the cost of your |
| house was transferred to the lender. This closing | | | | home. This would include the initial purchase price and |
| statement typically includes the unpaid taxes and | | | | all of the improvements during the time that the home |
| interest that have accrued, as well as the principal | | | | is owned. If the original purchase followed a gain on a |
| balance of the loan at the point of transfer. | | | | previous home that was deferred under pre-1997 rules, |
| As the seller, you would generally total all of these | | | | this will further lower your basis and increase the |
| "credits" and report this amount as the sales price of | | | | potential gain. |
| your property. | | | | There could be a surprising tax benefit to having your |
| The immediate concern is to determine if there is a | | | | home foreclosed upon.If you are in this fix, you have |
| taxable gain. Even though the rules relating to the sale | | | | probably stopped paying interest and property taxes |
| of a personal residence were changed in 1997, many | | | | for a while. During foreclosure, these expenses that |
| taxpayers are not aware of how to apply these rules. | | | | have been deferred end up being paid by the lender. |
| As it stands, it is no longer necessary to buy another | | | | The strange result is that even though you lose your |
| home or be older than 55 to exclude a gain. The | | | | home and have not been paying the taxes or interest |
| crucial issue is that you need to own and live in your | | | | in cash, you may still be able to claim these items as |
| home for two out of the previous five years. | | | | itemized deductions.Instead of going the foreclosure |
| However, even this two-year rule can be bent a little if | | | | route, you may be considering a "short sale" to save |
| you are selling because of a job change or if you | | | | your credit. This is discussed in another article that is |
| have other unusual circumstances. Since losing the | | | | also posted. |
| financial ability to maintain a property has been found | | | | |