Your foreclosure could affect any tax refunds you're due.
Foreclosure is one of those difficult experiences certain homeowners may have to go through. Not only does foreclosure affect your credit rating, but it also can make it difficult to purchase another home in the immediate future. Additionally, there may be tax consequences attached to your foreclosure. In certain cases, foreclosed homeowners have been hit with a significant tax bill that often reduces or eliminates any tax refund due.
Foreclosure Tax Consequences
Often, the Internal Revenue Service (IRS) considers debt that's forgiven by a lender because of foreclosure to be taxable income. Through calendar year 2012, the IRS is waiving taxation of mortgage debt forgiveness in certain cases. Because the IRS
is waiving taxation of forgiven mortgage debt, any income tax refund isn't affected by your foreclosure. However, foreclosures occurring in 2013 and beyond could affect the income tax refunds of those experiencing foreclosures.
Other Taxation Circumstances
After foreclosure, the IRS could consider taxable any cash you took from your home as the result of a refinance. In addition to cash-out income, any income you took from a home equity line of credit (HELOC) could be taxable under IRS rules. Your forgiven mortgage debt and income gained from refinances or HELOCs might also be taxable at the state level. California, for example, isn't currently taxing forgiven mortgage debt but does tax the income from any cash-out refinances and HELOCs.
Reporting Foreclosure Income