An acquaintance of mine once told me that she and her husband had to pay taxes on property they used for a business that had been repossessed for non-payment. They were operating a small business on the side and decided to call it quits as it was not generating enough income to offset the expenses. Since they still owed money on the property at the time it was repossessed, they were sent a form requiring them to pay taxes on the portion of the debt that was forgiven them by the finance company.
As I understand it, the same is true of real estate when it comes to foreclosures. If you were purchasing a home and the bank foreclosed on it for non-payment, if the bank sells the property for less than the fair market value of the house, you are responsible to pay taxes if there is a loss.
Like this:
Fair Market Value of Home - $150,000.00
Less Selling Price by Bank - $70,000.00
Your Tax Liability - $80,000.00
On the other hand, if the bank sold the property for more than the fair market value you would have zero tax liability.
The first scenario seems so unfair. If you lose your home to foreclosure that means you didn't have the resources to pay for it. Charging you with a tax liability for the difference in what the bank cannot recoup seems like a kick in the teeth. It was bad enough you were down, but should they add insult to injury?
News like this almost makes one afraid to buy a home or start a new business. Scary!
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