Foreclosure rates have seen an increase in the more recent years of the U.S. economy. Stories litter the news nightly and our papers every morning. The impact of foreclosure can be devastating on those going through it. The problems that occur, however, are not just impacting those that see foreclosure. Instead, it is important to understand the impact on taxes when homes go into foreclosure and ask what impact does this have on the economy? More importantly, an even better question to ask might be, what impact will this foreclosure have on me and my family?
Impact On Other Properties
The impact of foreclosure on the economy is multi-fold. First, a foreclosure on a home can actually drive down the cost of that home. Banks and other institutions that may then own the property are simply looking for a quick resale or turnaround. As a result, the property value is lowered and, in so doing this, the houses around that particular property can also be lowered in value. For this reason, the impact of a foreclosure extends beyond the front lawn of the property and into the lives and economy of those around it.
First Come, First Serve
A house that goes into foreclosure can have multiple mortgages on it. Anyone of the mortgage providers can actually begin foreclosure procedures, with the rest possibly following behind. Whoever files first is the one that must be paid in full first before any of the other mortgage institutions can collect their monies. As a result, what can happen are that those institutions waiting on their monies in the back of the line make up for the debt intake in other ways. This can mean that they raise rates on others at their bank, will not lend to more risky customers, and so on. In this way, then, a foreclosure can impact others that were not part of any problems in the first place.
Taxes
For those in foreclosure, taxes may actually become less burdensome. There is now a tax break available to many individuals going through foreclosure that may help them get back on their financial feet. The result, however, is less revenue to the government and, therefore, potentially higher taxes for other individuals in the future. This shows you the snowballing effect that foreclosure can have in the greater tax scheme.
Economy & Foreclosure
The above information helps to better explain how everything is interconnected in the economy of today. A foreclosure is not just about those going through it but, like so many aspects of our lives, it is also affects many others. To understand the impact on taxes when homes go into foreclosure and ask what impact does this have on the economy is to better seek the economic knowledge that may help keep you afloat in these tough times. For this reason, the above information is vital to you in your economic future.
Until 2007, homeowners would be taxed by the IRS based on the value of the debt relief they had. For instance, if you were a homeowner with $500,000 mortgage and a foreclosure was made on you, or you did a short sale, your tax liability would be computed based on the difference between what you owed and the relieved amount. This was something which sounded absurd, but the good thing is that the Mortgage Forgiveness Debt Act was passed by Congress in 2007, making homeowners to have some relief after the foreclosure.
One important thing that should be considered concerning taxes and home foreclosure is that even if you had your home foreclosed, it would not mean that you would be exempted from taxation for the next tax period by the IRS. When refinancing, the IRS does not forget your period home ownership. There are cases of people who used home refinancing cash for all kinds of things like going on vacations, buying cars, speed boats, etc. They did not know that the income was taken into account by the government, making you to pay tax on it.
There is a difference between home improvement and taking cash out of a refinance. The government does not tax money taken out to be spent on home improvement. If you are improving your home, you should have all the necessary receipts, or else, you would have to pay tax on it, instead of having it to be considered by the IRS as an investment in your home.
Sam is a financial writer with a particular interest in the abundance of times that payment protection insurance has been mis-sold at the cost of the customer, for this reason he is a contributing writer for ppiclaims.org.uk.