A common IRS tax problem or IRS tax controversy concerns raised by our Los Angeles, Riverside and Orange County clients to our tax attorneys centers around the tax problem which arises through foreclosure and short sales of real estate.
We are not talking about real estate taxes but IRS tax problems which arise as our housing markets crash in Los Angeles, Orange and Riverside areas.
IRS tax law requires all lenders to report to the Internal Revenue Service when they obtain partial or full satisfaction of a debt which is secured by interest in real estate. The lender is also required to report to the IRS when the borrower abandons property that is security for the debt.
Many California homeowners have no equity or are facing negative equity prospect in their homes also known as “upside-down” mortgages. Foreclosures are also exploding as Los Angeles, Orange County and Riverside Counties face year over year increase of foreclosures in excess of 290%. These events would normally trigger tax problems for many homeowners in California.
For example, if you owe $500,000 mortgage and the value of the home drops from $500,000 to $300,000, foreclosure sale at $300,000 relieves the borrower $200,000 in mortgage debt. This cancellation of debt in the amount of $200,000 is considered as income by the IRS. These borrowers, in addition to losing their house, would also get a rude awakening from the IRS in the form of debt forgiveness tax which could be in excess of $50,000.00. This surprise tax problem would devastate most people in Los Angeles, Orange and Riverside County.
However, new legislation signed by President Bush may protect many in California from tax problems when they refinance or lose their homes. IRS Tax Debt Forgiven by New Tax Law