Tax Effects of Forclosure

A woman’s oldest daughter became very sick and ended up in a wheelchair.  All of their finances went to medical expenses.  She ended owing over $80,000 in medical bills and lost her job as the result of taking time to take care of her daughter.  The recession hit and she did not want to give up her house.  She kept holding onto the house until she was financially devastated.  If you are in a situation like this, you are not alone…

There are lot of people in situations like this.  There are pro’s and con’s to walking away from your mortgage.  The first thing to deal with is the emotional stress that can come from being in this situation.  A lot of time people feel that they are disappointing their family as well as disappointing God.  You have to realize that you are in a position that you have to make a quality decision for the salvation of your family.  The priority should be God first, family second, and everything else next.  When you are losing your security, you have to get through the psychological part first.  Believe that God will be with you through your troubles and you can be on top again.

People have exhausted their retirement savings and 401Ks to pay for their mortgage.  When people get behind on their mortgage, the mortgage company refinances and rates go up, making it even harder for people to pay.  If you are in this situation, you really need to evaluate your options.  When someone is in real trouble financially, they are at a crossroad. 

If you have a Fannie Mae or Freddie Mac home loan, there is a program out that will renegotiate and lower your current rate/payments if you are struggling.  

Explore all of your possibilities and options before making the decision to walk away from your mortgage.  If you do decide to give up your home, it can sometimes take a year or two for the process to be completed.   So you have some time to save up for your move to your next home. 

It should be a last resort not a first option.  Save in the process of foreclosure to get into a new home/rental.

For this year:  If it is your personal residence that is foreclosed, you may not have to pay tax on the difference between what you owed and what you sell it for.