But before you give in to foreclosure, consider the tax implications, which if left unchanged, may shock you come April.
If you happen to foreclose on your home and the bank or mortgage lender is forced to sell your old property for less than the existing mortgage lien(s), the difference may be considered “debt forgiveness”.
The bad news is that this difference could be considered taxable income, despite the perceived hardship and physical loss associated with foreclosure proceedings.
And come tax time, the bank or lender could send you a 1099 with the total difference of “forgiven debt” including any costs, fees, and commissions associated with the short sale.
The total cost must be declared as income during the year that you foreclose, assuming you remain solvent.
So even if the home sells for just $5,000 less than the existing loan amount, additional fees and closing costs could push the “forgiven debt” to new, unexpected heights.
For those of you that got into a negative amortization loan or put zero down on a new property, only to see property values in your area crash, you may be at risk if you fail to make your monthly mortgage payments.
But before you decide to foreclose, make sure you weigh all your options to see which will work best for you financially.
If you’re lucky, your current lender may extend a loan modification or structure a new payment plan that can keep you in the black until the dust clears.
If all else fails, you may also consider a short sale, but if you do, be on the lookout for foreclosure scams involving companies that claim to help you avoid the foreclosure tax by transferring title into their name.
Despite the transfer of ownership, the IRS will still pin you with the “forgiven debt” and you’ll end up without a home and out whatever money the short sale company charged you.
The semi-good news is that Bush has made a proposal to Congress to allow a temporary fix to do away with the tax on forgiven mortgage debt, but such a bill may not be retroactive assuming it passes in the future.