IRS Web Site Helps Homeowners with Foreclosure

The IRS announced on Monday that it created a new web section for homeowners who lost their homes to foreclosure.

Some people who lose their houses through foreclosure may find that they then owe taxes on part of the debt that was wiped out, which in some circumstances is treated as if it were taxable income. Talk about adding insult to injury!

The IRS, though, wants to reassure taxpayers that there are special relief provisions which can reduce or eliminate the tax for many borrowers.

The new web section -- actually just a page, at least at this point -- contains questions and answers on foreclosure, a worksheet that will show whether you are eligible for any of the relief provisions, examples, and links to forms and publications.

It's written in the kind of dense and technical language that will send many taxpayers running to their tax advisors. Perhaps the page is intended for exceptionally brave tax do-it-yourselfers.

However, a law professor interviewed by the New York Times cautioned that the tax laws in this area are much too complicated for borrowers to navigate on their own, and that it is "crucial" that they get expert tax advice.

According to Monday's IRS news release, the tax problem that people who lost their houses to foreclosure face is this: if the debt that the foreclosure wiped out was greater than the value of the house, the difference between the two is treated as taxable income.

However -- and this is where the relief provisions come in -- if the borrowers' liabilities are greater than their assets, they may be able to offset the taxable income (from the debt wiped out by foreclosure) by the amount that their liabilities exceed their assets -- provided their house wasn't used for business or rented out.

If your debt was reduced or eliminated by foreclosure, you will receive a Form 1099-C from your lender at the end of the year. The IRS urges you to check it carefully, especially the numbers given for the amount of debt forgiven and the value of the home. The IRS also says that if you do end up owing taxes that you are not able to pay all at once, that you should make arrangements with them to pay in installments.

"Special Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many," IRS News Release, September 17, 2007

"Questions and Answers on Home Foreclosure and Debt Cancellation," IRS

Fabrikant, Geraldine, "After Foreclosure, a Big Tax Bill From the I.R.S.," New York Times, August 20, 2007