The IRS is having a sort of closeout sale in 2012, it seems to all of us bankruptcy attorneys in Indiana who work with clients to help stop foreclosure on their homes. In fact, one lawyer for bankruptcy is posing the question, “Is bankruptcy your best investment?” Moran is alluding to the federal tax exclusion for cancellation of debt on foreclosures of principal residences, which is set to expire at the end of this year.
Let me go back to something I’ve explained in earlier Bankruptcy in Indiana articles:
- When someone forgives a debt you owe (meaning you don’t need to repay it), Uncle Sam considers that income, and charges you income tax on that amount just as if you’d earned it through working.
- As one of the Columbus bankruptcy lawyers who is my colleague explains to all her clients, bankruptcy has actually been one of the big exceptions to that rule, in that many debts that are discharged by the bankruptcy court are not subject to income tax.
- When the housing downturn became so serious, a new set of rules was put into place having to do with mortgages and foreclosures. The way things work right now, when mortgage debt on a primary residence in canceled, either through the bank foreclosing on the home, through a mortgage modification, short sale, or deed-in-lieu-of-foreclosure, that is NOT considered to be taxable income.
Perhaps, as you read this information, you may be thinking that by the time people get to the point of a foreclosure or of filing personal bankruptcy in Indiana, they are probably not in a very high tax bracket, so that forgiveness of taxes might be the last thing on their mind. As a longtime debt consolidation lawyer, I’d urge readers to think again.
With real estate values having declined so sharply in recent years, many residents have mortgages larger than the resale value of their homes. Think about the potential income taxes on, say, the $30,000 – $200,000 on a mortgage that is forgiven next year as opposed to this year, when the IRS forgiveness plan is still in place!
By way of providing useful Indiana bankruptcy information, I thought it crucial to explain that the Mortgage Forgiveness Debt Relief Act of 2007, put into place in December of 2007, applies to debt in calendar years 2007 – 2012 ONLY!
I’m certainly no tax accountant, and always refer clients to CPA’s when they need tax advice. And, of course, no client would ever consider either bankruptcy or foreclosure as a “bargain” to be sought after. But what attorney Moran was trying to express, I thing, is that, if filing individual bankruptcy in Indiana is in the cards, or if foreclosure on a primary residence seems inevitable, 2012 begins to look like a tax law ‘closeout sale”!
Categorised in: Bankruptcy Indiana
This post was written by Mark Zuckerberg