REAL ESTATE FORECLOSURE OR SHORT-SALE, ARE THESE TAXABLE?

"What? .... Do you mean to say that I may still have to pay a capital gains tax (income tax) even if I have already lost my property on a foreclosure or if I had sold it for a much lower value? Why is that?" This is the usual response of our clients after we have explained that current tax law considers a foreclosure to be a "sale of the real estate property" and short-sale is taxable. Yes, we agree with you that these laws seem rather strange. However, there are several reasons why a foreclosure is considered a "sale" that more often results to taxable capital gains tax, especially when the Mortgage Loan is high and/or has been refinanced. It happens with rental properties and/or residential properties that are foreclosed. In the case of a short-sale, the unpaid mortgage after the sale also becomes a taxable income.

Yes, there might be a capital gains tax on your foreclosure and like many of our clients we know what you are going to say, "it is unbelievable"... For many former property owners, the news of a capital gains tax on their foreclosure is quite depressing. The taxable unpaid mortgage makes their short-sale even more depressing. We offer alternative solutions to these problems.

Foreclosure is considered a sale and the selling price of the property is generally the amount of the mortgage loan(s) (but there are exceptions). At the end of the year, the Mortgage Lender reports the foreclosure to the Internal Revenue Service and the Franchise Tax Board. The property owner will then receive a Form-1099A and/or Form-1099C issued by the Mortgage Lender. These Forms-1099 explain how the lender treated the mortgage loan default. When the property owner files his or her income tax returns for the year of foreclosure, as a taxpayer, he or she is required and responsible to report the foreclosure (sale) and unpaid mortgage. Then the taxpayer must compute the capital gains and pay the taxes on his rental property or residence. These rules are quite complex. So, do not do report these without professional help. We could help you with these problems.

Over the years, we have helped many of our clients deal with the capital gains tax issue on foreclosed properties and the unpaid mortgage on a shortsale. In many cases, when the client could not afford to pay the tax because of his or her distressed financial condition, we explore the legal options that are available to them. We do the tax planning ahead of time before the IRS and the Franchise Tax Board tax collectors could come. We would like you to know that certain tax strategies may be available to you with your capital gains tax and cancelled mortgage. We will be able to help you.