If foreclosed, will you still owe money? Very likely but the question is to whom! You could end up owing the KGB…..er I mean the IRS. If you thought owing money to a mortgage company like Citi, Chase or Bank of America was bad wait until you owe the IRS.
Time after time we hear homeowners say things like:
- “I’m going to just give it back and be done with it.”
- “I don’t have any money and only pay cash for things so they can’t get nothing!”
- “I’ll show them, they can have this stupid house; it ain’t worth what I owe anyway!”
While these might make for good one-liners they are meaningless when it comes to what you owe or “putting it to the bank”. The bank is only one party you owe. You likely owe your HOA, your property taxes, that water softener you added, etc.
But let’s focus on the mortgage debt for a moment. If and that is a BIG if, your mortgage company chooses to forgive the debt versus sue you for what is still owed after foreclosing, the forgiven debt could cause the IRS to come looking for you.
But you say, hey what about that law that forgives all my mortgage debt? Ok, let’s look at it.
Part 1 – If the mortgage debt is forgiven you SHOULD NOT owe taxes if:
- You short sale your homestead and the bank forgives the deficiency.
- You lose the home to foreclosure (or deed in lieu) and the bank forgives the deficiency.
- You sell a non-homestead property and are insolvent BEFORE the house goes away.
Part 2 – If the mortgage debt is forgiven you likely WILL OWE taxes if:
- You short sale a non-homestead property (i.e. you’re not living in it)
- You lose a non-homestead property to foreclosure.
- You lose your homestead to foreclosure and you had a cash out refi that paid bills or bought stuff. (i.e. not attached to or improved the home)
Bottom Line: If you are facing a foreclosure situation or need to dispose of your house but don’t have any equity, a short sale is almost always the best route as you can negotiate the terms of the outstanding debt. Additionally, you keep a foreclosure off your credit report. In every case, talk to a professional ASAP or the next person you talk to might be Mr. IRS agent.
- The Bank Slayer
