Taxes Consequences during Financial Crisis

Abstract

This research paper discusses the status of real estate law in the United States of America. It goes on to consider important concepts in law like bankruptcy, foreclosure and loan modification in relation to taxation, as these are a cause of great concern in the current economic recession. The paper further highlights the current state and recent reforms in taxation system and its effects on individuals faced with financial crisis.

Introduction4

Background4

Discussion4

Tax Consequences of Foreclosure4

Property Tax Lien Foreclosure5

Tax Consequences of Loan Modifications7

Taxable Loan Modification8

Tax Consequences of Bankruptcy8

Separate Taxable Estates8

Duties of the Filer at the Chapter 7 Bankruptcy Filing8

The Bankruptcy Estate8

Automatic Stay and Tax Assessments9

Payment of Tax Claims9

Conclusion9

References10

Taxes Consequences during Financial Crisis

Introduction

Background

The mortgage crisis of 2007 which caused global financial unrest and resulted in a sharp fall in property prices in the United States; property value diminished to the extent where the house itself is worth much less than the mortgaged amount. This downfall is the anticipated result of banks lending loans for home financing to buyers who could not manage to pay back the loan. Overtime, as interest rates increased most of the borrowers found they were unable to repay the loans; as a result people had no option but to either foreclose on their property or evacuate it with empty hands. On the other hand the value of property was diminishing and banks and lending institutions instead of earning interests on mortgages were in possession of depreciated property (Bianco, 2008). In the midst of this economic downfall people in great financial distress could not escape taxes.

Discussion

Tax Consequences of Foreclosure

Foreclosure is the process where the lender of a loan forces the sale of the borrower's property which he or she had mortgaged against the loan, because the borrower fails to pay back the loan or its installments. Foreclosure enables the creditor to attain a settlement of his account, and if an extra amount is obtained after the satisfaction of the loan it rests with the owner of the foreclosed property.

Even after the traumatic procedure of foreclosure the defaulted debtor will not be given exemption from all his debts relating to the real property. Soon after the foreclosure the Internal Revenue Services (IRS) sends the tax bill, as for federal tax purposes foreclosure is treated as a sale of property. This is because the defaulted debt is treated as taxable income by the IRC regulations, and has to be disclosed as an additional income on the tax returns (Nolo, 2013). The good news is that the tax regulations relating to foreclosure today are not as strict as they were in the past, more so for personal residence property as compared to investment property.

Calculating Capital Gain or Loss

After the foreclosure the property owner subtracts from the selling price the cost of the real property, this is done to determine whether there has been a loss or a gain in order to report taxes. The difference reveals the amount of profit earned or loss suffered on the ...