Type of mortgage matters

 Just how much and what type of tax the IRS expects after a foreclosure depends in large part on whether the loan is of the recourse or nonrecourse variety.

With a recourse loan, the debtor is personally liable for the debt. In a foreclosure, it means if the property-sale proceeds are not enough to cover the outstanding mortgage, the debtor must pay the difference. This includes interest that accrues during the foreclosure process.

A nonrecourse debt, however, is secured by the loan collateral. If money from sale of the property doesn't cover the outstanding debt, the lender has no legal ability to get the additional funds from the debtor.

"In nonrecourse situations, you have a house, the mortgage and the market value of whatever the bank can sell it for and put toward the outstanding loan," says Ted Lanzaro, a CPA in Shelton, Conn. "If the house is worth $100,000 and there is a $110,000 loan on it, the bank in a nonrecourse situation cannot go after the borrower for that $10,000 difference."

Cancellation of debt income and its tax implications typically come into play with recourse loans. If the house's fair-market sale price is less than the unpaid mortgage and the lender forgives the remaining mortgage debt, that amount is taxable income at ordinary tax rates.

With either type of mortgage, a foreclosed-upon homeowner could end up owing capital-gains taxes without ever receiving any money from the foreclosure sale.

The Foreclosure Fraud Alert Website http://www.foreclosurefraudalert.com/

The Foreclosure Fraud Alert Blog  http://www.foreclosurefraudalert.com/fraudblog

<< Previous    1  [2]  3  4  5    Next >>