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For years, if a homeowner agreed to a Deed in Lieu, Consent to Final Judgment of Foreclosure or Short Sale, they could walk away from the foreclosure with diminished consequences.  All this has changed in a most dramatic way, effective January 1, 2014 because the Mortgage Debt Relief Forgiveness Act has expired.  Now, if a homeowner agrees to settle their foreclosure case, they will be hit with hundreds of thousands of dollars in tax liability.  Not,

“A homeowner in foreclosure might be hit with tax liability….”

“A HOMEOWNER IN FORECLOSURE WILL BE HIT WITH TAX LIABILITY!”

Here’s how it works….if you’ve got a home in foreclosure with a $300,000 mortgage on it and it short sells for $100,000, that $200,000 difference is counted as income to the homeowner.  And this is the truly devastating part….

The Homeowner Will Be Taxed at Their Effective Tax Rate On That Difference

Now of course adding insult to this extraordinarily unfair injury is the fact that through complex tax transactions, the banks and institutions undoubtedly take massive tax benefits from these “losses” that they suffer, while at the same time everyday Amerikans suffer the real consequences.

One of the real consequences of this for homeowners is that we’ve got to think long and hard about any settlement offers….for many reasons it’s probably far better to take the risk of a foreclosure final judgment and sale rather than the certainty of tax liability……

Much more on this later….

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