Foreclosures, debt cancellation help

December 21, 2008 7:03:33 AM PST
Last week, the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration adopted sweeping new rules for the credit-card industry. Ginger Broderick, President of Broderick and Company CPAs, joined us with tips for debt cancellation and home foreclosure procedures. What is cancellation of debt?
If you borrow money from a bank or use a credit card, and the lender later cancels or forgives the amount you owe them, you may have to include the unpaid money on your personal income tax return and pay taxes on it.

The idea is, you borrowed the money and because you agreed to repay the loan proceeds, it was not included as taxable income. If that loan obligation is later forgiven, the unpaid proceeds become a taxable item. The lender is required to report the amount of cancelled debt to you and the IRS on Form 1099-C, Cancellation of Debt.

Is "cancellation of debt" income always taxable?
Not always. There are some exceptions, bankruptcy being the most common type of situation.

Are there tax consequences if I lose my home through foreclosure?
The steps in determining any taxable portion of a foreclosure are complex and I suggest you use the assistance of a tax professional to determine what amount could be taxable to you. The amount depends on the debt, fair market value of the property, and the purchase price plus the cost of major improvements.

You also have to determine if the property is your principal residence and if you meet certain residency requirements over a five year period of time. Depending on the circumstances, the amount could be a non-taxable event or taxable as a capital gain, reported on Schedule D, Capital Gains and Losses.

Can I claim a loss if I lose money on the foreclosure of my home?
No. Losses from the sale or foreclosure of personal property are not deductible on your personal tax return.

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