To understand the consequences of foreclosure, it’s essential to know what foreclosure means.
Foreclosure, a legal process, enables your mortgage holder to cancel a Borrower’s right of redemption. Or one’s right to buy back their property after it’s under foreclosure for non-payment.
Foreclosure can significantly affect a Borrower’s tax liability. Also, how much they may still have to pay in taxes even after a foreclosure.
Circumstances may differ in different cases; however, generally, there are two types of taxes applicable to foreclosure: 1) income tax and 2) capital gains tax.
The deficiency arising out of the amount recovered by the lender and the amount of mortgage you still owe is taxable income at the time of foreclosure. For example: if your total amount owed to your lender is $500,000 and the property is sold at auction to the highest bidder for only $450,000, you as the borrower may lose $50,000 tax. That might not be true if the following deficiency arose from a loan taken to improve the principal home or another property’s acquisition. This exception is granted under the Mortgage Forgiveness Debt Relief Act 2007.
Suppose the proceeds from the property’s sale at a foreclosure auction are higher than the property’s cost. In that case, it raises the opposite issue, called a capital gain, which triggers a different tax liability type. If you buy the house for $400,000 and sell it at auction for $600,000, the capital gains would be $200,000, minus the expenses incurred on improvements, if any.
This capital gain will be taxed on the Federal Capital Gains Tax Rate of 33%, resulting in your total tax amount due of $66,000 if you sell the property within 12 months of purchase. Or $30,000 if you sell/ property forecloses AFTER 12 months from the purchase date (these are rates for 2015). You can elicit the help of a tax advisor to find out your capital gains liability if any, and related tax issues on the foreclosure of your house.
In some judicial foreclosure states, The lender grants a certain period to a borrower after the foreclosure is complete. Giving the homeowner the chance to redeem the property by paying off the mortgage in full. That is the Redemption Period. However, in California, this right of redemption is non-existent on non-judicial foreclosures. Since in California, they share the non-judicial foreclosure. Only a few homeowners have the opportunity to reclaim their property after foreclosure in individual counties, even if their financial position is strong enough to be able to afford to redeem the property.
If the home bears any additional lien(s), excluding the mortgage lien, all other liens disappear at the time of foreclosure. The process is lien stripping. However, this does not mean the debts behind that lien are gone as well. Post-foreclosure, lien holders may still be able to sue the borrower and force the borrower to forfeit the debt through one of the following means: wage garnishment, automatic fund withdrawal from your bank account, intercept your state/ federal tax refunds, and in some cases, even imprisonment, yikes!
Foreclosures have a long-term, detrimental effect on your creditworthiness and the FICO credit score of a borrower. The outcome remains hanging like a death toll over your credit report for up to seven to ten years. It harms you while applying for credit and loans. It’s limiting your access to capital and increasing the cost of any money you can secure. It also creates difficulties in getting a new home/ mortgage. You will likely incur more scrutiny, higher down payments, and move in deposits required for your new residence. All because of the adverse effects of foreclosure on your overall financial future.
Most landlords also ask for an advance rent check as the foreclosure acts as a red flag and casts doubt on your ability to pay and pay on time. So this is a property manager or landlord’s way of confirming you are financially solvent to be able to afford the rental and charge you for having a bloodstain on your credit report, even if it was not your fault.
Foreclosure is always a painful process, no matter what the circumstance. So it is strongly encouraged for you to seek the help of a third-party professional that can make the road to recovery from foreclosure as simple as possible. While you are recovering, it is essential to protect your mind and know it’ll get better. You want to receive empower messaging from an expert in this area of real estate and the process, so you have enough information on all your available options every step of the way.
Here at Imperium Enterprise, we help homeowners facing financial hardship to avoid foreclosure by selling their property on their terms. Why wait to let the bank force you into foreclosure and steal your equity? Act now to avoid compounding the residual effects of foreclosure on your family and financial future, and freedom. Stop being a slave to your mortgage and an address. You have the power to change your outcome if you decide to change your income and output.
One of the most potent actions homeowners facing foreclosure can sell the home before they lose it. If you want to avoid foreclosure and/ or need advice on any real estate related issue, we invite you to reach out to us any time. Our seasoned Foreclosure Specialists team can help even the most complex situations to get you the mortgage assistance and debt relief you may need now or soon through our simple process and convenient loss mitigation services.
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