If a homeowner has taken out a “home equity loan” (or aka, HELOC) loan and has received any cash out (even from a past refinance) to pay off unsecured debts, (i.e. credit cards, car loans, motorcycle or boat loan, etc…), the sum of that money maybe considered a “taxable event” aka mortgage debt forgiveness” by the IRS).
The “debt forgiveness” is calculated by deducting the original purchase price (or acquisition cost) FROM THE “NET LOSS” THE BANK INCURS after the home reverts back to the bank and is sold by their real estate division. Renovation Costs can be added to increase the base value…but in the case of an audit the proof is on the home owner and they must have all receipts.
For Example:
Original Price: $200,000
Reversion Price: $275,000
REO costs to sell the property: $25,000 (Agent commissions, maintenance / repairs, etc…)
Net Loss to Lender $100k
This money is taxed at a (Maximum Federal) “capital gains” rate of 28% ($28,000)
NOTE: In addition your home state might have a “capital gain” tax as well).
The net loss amount is reported by escrow the to the IRS.via a form “1099 C” to the Federal and state tax institutions.
IN THIS EXAMPLE: The money owed to the IRS is approximately $28,000
NOTE: IRS debt can not be discharged by Bankruptcy.
Funds owed to the IRS are only forgivable if a tax payer can prove insolvency. (which is very difficult to do- be prepared for a 3 year comprehensive audit.
Homeowners that can’t pay their taxes in full are subject to a 18% charge…the IRS has a payment plan…at a 18% interest rate. -Assuming there are no penalties for missed payments).
If you can use the hyperlinks on this page, please go directly to my website at http://www.fmcbanker.com/IRSTaxConsequences to get this article and the hyperlinks
Gerard Ladalardo is a seasoned mortgage professional dedicated to the personal attention and exceptional customer service to his clients and realtor partners. Please visit my informational credit and insider tips website at http://www.ExpertCreditHelpNow.com for information and FREE reports!
