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The Tax Implications of Home Foreclosure


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TERMINOLOGY

A home foreclosure may have tax implications. Depending on the amount you owed your lender when the property was seized, you could end up owing the IRS thousands of dollars after you lose your home.

You Owe Taxes on Forgiven Debt

If your home was worth more than you owed on your loan, you won’t have any outstanding debt after foreclosure. If your home was worth less than your loan balance, however, you still owe however much of your loan balance remains after your lender sells the property. This is known as a “mortgage deficiency.” Some lenders opt to forgive mortgage deficiencies rather than pursue them. The lender may then write off the forgiven debt as a tax deduction--leaving you obligated to pay taxes on the full amount.

Tax Relief after Foreclosure

Thanks to the Mortgage Forgiveness Debt Relief Act, consumers who lose their homes to foreclosure aren’t liable for any resulting taxes until January 1, 2013. This consumer protection act does come with restrictions, however. Tax relief is available only if you lose your primary residence to foreclosure. If the property was a rental house or vacation home, you are still liable for paying taxes on the percentage of the loan balance written off by your lender.