It wasn’t long ago that home mortgages were so attractive people were flocking to buy homes. Today, I can’t turn a corner without hearing about foreclosures. The Mortgage Bankers Association reports foreclosures are at the highest rate in the organizations 55-year history. This trend is expected to continue well into next year. It is no shock that states like Arizona, California, Florida and Nevada are leading the pack. These were hot places to invest in real estate, especially for people who never intended on occupying the homes themselves.

Foreclosure is becoming such an epidemic that the IRS added a new section on their website to help guide taxpayers. Although I was disappointed to find the ‘œsection’ the IRS promotes is actually just a single page with a link, the information is surprisingly clear and concise.

As if foreclosures are difficult enough to deal with emotionally, logistically, and financially, there are tax ramifications to consider too! Here are the basics.

  • If the amount of debt relieved by a foreclosure is greater than the value of the property foreclosed, the difference is usually taxable.
  • Foreclosure related relief provisions can potentially reduce or eliminate the tax consequences for certain taxpayers.
  • There may be circumstances where taxpayers relief may be limited or unavailable.
  • Remember, you can always make payment arrangements with the IRS. Although it may cost you a little extra in interest and fees, it’s a better alternative ignoring your taxes.In the worst case scenario, you may be able to work and offer-in-compromise to settle your tax debt for less than the full amount.

Kay Bell at Don’t Mess with Taxes elaborates on congressional politics and foreclosure tax relief. She also lists more than a half-dozen links that explore the tax implications even further.

If you’re faced with foreclosure, stay calm and face your situation. Avoiding this situation and wishing this problem would simply go away could end up costing you thousands of dollars. Please contact a trusted tax professional to help guide you through this difficult time.