Tax Consequences of a Strategic Foreclosure

Doing a strategic forclosure does not always completely eradicate the debt.

The difference between the value of the property at the time of forclosure and the amount of the mortgage (assuming the mortgage is larger) is considered by the IRS as “debt forgiven” and is “income” subject to income tax.

Until December 31, 2012, a provision of the Mortgage Forgiveness Debt Relief Act of 2007 declares that this “imaginary income” of the strategic forclosure will not be subject to income tax.

Before a lender begins a forclosure sale of a property subject to  Federal tax lien, he must give 25 days notice to the Internal Revenue Service. Failure to do so causes the Federal lien to remain attached to the property after the sale.