Lisa Simpson
Jun 3,2010
In: Foreclosure

Tax Hits Pop Up as Ugly Surprises for Many

Tax hits pop up as ugly surprises for many sending out a warning to those who are mulling over walking off from unmanageable mortgages. Taxes will not leave them.

Although all residential house owners, who have gone underwater, will not have reason to be alarmed, many of them are finding that the loss of a house can cause heavy tax obligations.

The instance of McDaniel, a 59 year old widow, can be cited as an example. She walked away from what had once been her own house covering 4,300 square feet in Loveland, Colorado. It had been built by her husband and herself. But after his demise in 2008 July, she found it impossible to manage the monthly dues of $3,000 from her earnings as a nurse earning $34,000. Her loan carried a staggering interest of $500,000. So she just stopped paying and took shelter in the home of her uncle. But a second blow has come from IRS that has landed her with taxes on a debt of $150,000. The IRS considers cancelled debt to be a kind of income.

The couple had refinanced a minimum of three times; one was a cash out loan. The deals caused her trouble. The first loan taken would be exempted from the filings as it was exclusively in connection with the property. But debts made for other reasons would not come under the same category and thus would be liable for taxes. McDaniel rued, “I had no clue this would happen. I just thought I’d get out from under the house and that would be that.”

Even while the economy continues to totter trying to get back on its feet there are millions like McDaniel who are waking up to the harsh fact that walking away from an ugly mortgage is not always the last solution. It could invite heavy tax bills amounting to thousands.

Thus anyone thinking of exiting should give this angle a thought prior to making any move. The same rule applies to any consumer debt taken that is canceled; it does not mean freedom from taxes.

For a long time both federal and state laws on taxes have considered the amount forgiven or canceled on debts as income.

Michele Knight deals with high end clients. She is located in Keystone, Colorado. So far she is dealing with five of them whose taxes are tied to houses they have forfeited. Another five are saddled with forgiven debts on credit cards and automobile debts. She said, “They’re calling me in tears and saying, ‘What do you mean I owe taxes? I never would have expected it.’”

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