Boston Homeowners With Mortgage Debt Could Face Taxes

Boston residents who have lost their homes to foreclosure this year may likely be subject to taxes by the IRS, according to CNN Money. Those who had some of their mortgage debt forgiven after selling their house for less than the mortgage balance could also face the same tax fate, since the IRS considers forgiven debt you are personally responsible for as income.

The Mortgage Forgiveness Debt Relief Act in 2007 ended the liability on mortgage debt for most homeowners, meaning the IRS will not typically count the difference from short sales or foreclosure as income until 2012, when the act will expire. However, CNN reports there are four main exceptions to the act:

   1. If you have a home-equity line of credit, the IRS will only forgive the tax liability on your loan if the money was used to pay for home improvements, because it will add to the value of your home. You will also need to have receipts available for proof.
   2. You refinanced your home but used the money to splurge on something else, like on a vacation, a new car, or paying off your student loans or credit cards. Just like with the home-equity loan, funds used to improve your home will not be taxed, but the IRS will treat the forgiven debt you took out as cash and spent elsewhere as taxable income.
   3. If you owned a multi-million dollar house, only the initial $2 million in forgiven debt can be covered under the relief act, while the remainder is left subject to taxes.
   4. If you lost a vacation home or investment property that you did not list as your primary residence for at least two of the last five years, you will likely have to pay taxes.

To learn more about your legal options when it comes to potentially paying taxes for your mortgage debt, seek legal counsel from an experienced real estate attorney who can evaluate your case and determine other possible alternatives to resolving your mortgage debt.
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