If you’re a duplex, triplex or apartment building owner who’s behind on mortgage payments and facing foreclosure, please do me one favor.
Call a qualified tax professional and pay whatever it costs to discuss your specific case with them before you let the property go back to the bank.
See, when a bank “forgives” the debt of your loan, this may be viewed by the Internal Revenue Service as a gift. Gifts can be taxable.
This is not true for single family home owners. But if you live in a duplex, the unit generating income property is considered an investment, and therefore, taxable.
Just imagine losing the duplex to foreclosure, years of tarnished credit, and then facing a huge bill from the IRS on top of it.
And guess what? Not even filing bankruptcy can protect you from the IRS.
Before you panic, know that you may also not owe taxes. Unfortunately, there isn’t a single standard for everyone. Rather, your tax liabilities or lack thereof following an investment property foreclosure are determined by something called your “basis”, which of course, is unique to you and your property only.
This tax consequence can also be true if you are considering a short sale. However, on average short sale properties sell for considerably more than bank-owned properties. In other words, if a short sale or foreclosure is, in your case, a taxable event, selling your property for more money will result in a smaller amount of forgiven debt, thereby reducing the amount that can be taxed.
There are options if you’re facing foreclosure with your investment property or duplex. Whether you choose to let the property go back to the bank, sell it as a short sale, or are successful with a loan modification, it’s important to be fully informed of all the potential consequences before you make your decision.
No matter what, know this. Life will get better. I promise you.