Will I owe Income Taxes After Foreclosure in Georgia
Even though you can sometimes owe income taxes after a foreclosure in Georgia, you may be able to avoid tax liability by filing bankruptcy.
Most of the time, when your home is foreclosed, all or some of the loan is canceled or forgiven–meaning, you no longer have to pay it back (unless the mortgage company seeks the deficiency balance from you pursuant to Georgia foreclosure law). The Internal Revenue Service (IRS) considers the canceled portion of your loan to be part of your taxable income, also known as cancellation of debt income (or COD income). The IRS becomes aware that you have COD income when the lender reports the debt cancellation to the IRS on Form 1099-C. You must pay taxes on 1099 income.What Portion of the Mortgage Loan is Considered Income?
You may be asking how a mortgage debt from a foreclosure can be considered income. Here’s an example: You borrow $100,000 and default on a mortgage loan after paying back $88,000. If the lender decides not to collect the remaining debt from you, there is a cancellation of debt of $12,000, which generally is taxable cancellation of debt income for you.How Do I Avoid Taxes After a Forclosure?
COD income is not always taxable! You can avoid having COD income through:
- The Mortgage Debt Relief Act of 2007
- Discharging Debts Through Bankruptcy
To discharge some or all of your debts through bankruptcy, you must have a qualified bankruptcy attorney file a petition with the clerk of the bankruptcy court on your behalf. Unless there is litigation involving objections to the discharge, you will usually automatically receive a discharge. The discharge will ensure that you have no taxable COD income and will not owe the IRS when your home is foreclosed!
For information on other situations when COD income is not taxable, including non-recourse loans, insolvency and the operation of a farm, visit IRS.gov. Also, please note that this article is provided for informational purposes only and should not be construed as legal or tax advice. You need to consult with a tax accountant or tax attorney in order to obtain advice that is specific to your individual circumstances.
If you are considering filing bankruptcy and would like to speak to a bankruptcy lawyer in Atlanta, Georgia, contact the Law Offices of Charles Clapp at 404.585.0040 for a free initial consultation.