If you are one of the many homeowners who did a cash out refinance or home equity loan on your house and spent the money on things other than repairing your home, you may owe a big tax bill.
The IRS is looking into the foreclosures of those who refinanced their homes and then went into foreclosure, which is most of California, Arizona, Florida, and Nevada it seems.
Many homeowners took cash out when they refinanced their homes and used the extra dough to pay for new cars, boats or vacations. Say you did that and then got into trouble, losing the house through a foreclosure or short sale. Even if your lender waived the remaining debt, the IRS will treat as income the portion of the forgiven debt that you took out as cash and spent. Only the funds used to actually improve your home won’t be taxed. Yes, even if you spent the money on paying off your student loans or credit cards.
The IRS’ reasoning is that only the money spent on home improvement actually added to your home’s value. And that, presumably, diminished the difference between what you owed on your mortgage and the value of your home when it was foreclosed. via CNN Money
With tax day coming up this week and you are in this situation it may make sense to contact a CPA or tax professional to see if you owe anything. The penalties and interest charged by the IRS will more than pay the cost of the appointment if you do owe.
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This tax season could be an ugly one. I’ve worked with several people in this situation this year alone. I can only imagine what it’s like nation wide.
Tom, thanks for posting this. I think it is kind of amusing that the IRS is going to spend our money and resources pursuing people that obviously have nothing. It’s not like the banks agree to short-sale or forgive debt they believe is recoverable. – Allison