Tax Consequences of Home Sales and Foreclosures
CPA Journal, The › Vol. 78 Nbr. 9, September 2008
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Summary
In many areas of the US, home prices have fallen during the past year. The number of housing units for sale has increased. So, too, has the average length of time before a housing unit is sold. Late payments on mortgages are on the rise. During the last decade many homeowners took out second mortgages and home equity lines of credit on their homes, which are now causing financial strain on homeowners in a declining market. The most troubling result of these factors is the recent surge in foreclosures reverberating through the housing market. Given that the sale of a principal residence at a loss is nondeductible, a taxpayer might consider converting the property to either rental, trade, or business property. As a general rule, in order to convert the property from residential to rental status, the property should be held for rental at a reasonable value for at least 12 consecutive months.
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Tax Consequences of Home Sales and Foreclosures
In many areas of the United States, home prices have fallen during the past year. The number of housing units for sale has increased. So, too, has the average length of time before a housing unit is sold. Late payments on mortgages are on the rise. During the last decade many homeowners took out second mortgages and home equity lines of credit on their homes, which are now causing financial strain on homeowners in a declining market. The most troubling result of these factors is the recent surge in foreclosures reverberating through the housing market.
Part of this surge is attributable to the dramatic growth of subprime lending. These mortgage loans are typically structured to allow borrowers with lower credit scores to purchase a home. These loans often involve one or more of the following features: a low down payment, an initial "teaser" interest rate, "interest-only" financing, and an adjustable interest rate.Subprime mortgage loans often pose risks to borrowers. As interest rates rise, borrowers with adjustable rate mortgages (ARM) face higher monthly mortgage payments. Subprime borrowers also face difficult choices when the prices of other necessities (such as food, utilities...See the full content of this document
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