Properties with foreclosure fillings are down 83% year-over-year. With this, one can only speculate at the number of foreclosures that will be filed this time next year, when the moratoriums are lifted. At the state level, Colorado, Massachusetts, Michigan, Minnesota, and California are expected to see the biggest spikes in foreclosures. In contrast, Florida, Oklahoma, New Mexico, Maryland, and Kentucky are poised for the smallest increases in foreclosure filings.
Currently, lenders and loan services can not foreclose on a home, but as people continue to lose their jobs, furloughs are extended, and homeowners fall further behind on payments, the likelihood of those homeowners facing foreclosure increases.
As if having your home foreclosed isn’t devastating enough, the amount of debt forgiven after the foreclosure is complete is considered taxable income. Fortunately, there was an extension (also referenced in the CNBC article) to a tax break called the Qualified Principal Residence Indebtedness (QPRI) exclusion. You can read up on this exclusion by clicking here.
Under the QPRI exclusion, if the property being foreclosed is a primary residence then you do not have to include the forgiven debt in your gross income. Previously, this only applied to cancelled debt incurred between 2006 and 2018. The extension will allow it to be utilized through 2020, but it will not apply to debt discharged in 2021.
But this is where additional concern lies.
If an individual or family is not able to avoid foreclosure on their home after the moratorium has been lifted, they will still be facing foreclosure in 2021 and will be unable to utilize this tax break. That means that once the debt is forgiven, they will receive a form (1099-C) detailing the amount of the loan cancelled and that amount will need to be claimed as taxable income come filing season. What’s worse, is many of these people will be unaware and unprepared.
So, what can be done?
Be proactive and work with your loan servicer to create a plan that will prevent late payments and avoid foreclosure. If there is no avoiding it, these individuals will need to speak with their tax preparers to figure out alternative options. There may be another way to avoid the discharged debt being included in taxable income.
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