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Paying Taxes on a Repossessed Home
- 1). Calculate what your property tax liability is. While a home is legally yours, you are responsible for paying the property taxes assessed on it. However, once the home is no longer yours, the tax liability passes on to the new owner -- the bank. However, you may continue to receive bills and notices from your local tax authority. If you want to avoid dealing with these notices, paying the property taxes incurred before the foreclosure went through may be a better option.
- 2). Settle the property tax liability. If you owe property taxes at the time of a foreclosure, the mortgage company takes on the tax liability. But when it subsequently sells the home, the person who purchases it inherits the liability and must pay it off to gain a clear title to the home. Finding out whether a public tax auction has occurred or whether the home has been sold can allow you to prove that you're no longer liable for the tax liability.
- 3). Determine your tax liability on the canceled debt. Typically, when a lender forgives debt, the Internal Revenue Service considers it to be income for the debtor who must pay taxes on the amount. The Mortgage Forgiveness Debt Act of 2007, which runs through 2012, allows taxpayers to exclude “income” from the discharge of debt from foreclosure on their primary homes. Up to $2 million of debt from a foreclosed home can be excluded from income in taxes.
- 4). Report the canceled debt on your taxes. The IRS requires that people who’ve had debt canceled as the result of foreclosure report the cancellation on their taxes. One key reason for this is that there are some exceptions to income exclusions provided by the Mortgage Forgiveness Debt Act of 2007. For instance, to have the forgiven debt excluded from income, the foreclosure must have been a result of a decline in financial position. Having the debt reported on taxes allows the IRS to determine whether taxpayers are truly eligible to have the canceled debt excluded from income.