A brief overview of some of the unique tax issues involved in purchasing homes in foreclosure.
Millions of people lose their homes to foreclosures every year because they cannot afford to pay the mortgage or the taxes or both on the home. You might see ads on television or read magazine articles that say you can buy a home in foreclosure for pennies on the dollar. While there are always stories of people who bought houses for as little as a few hundred dollars, you seldom hear about the additional costs that the buyer incurred, especially as it relates to taxes. When a lender or a mortgage service company forecloses on a property, the original owner might stop paying property taxes. If you become the new owner of that home in foreclosure, you may be held responsible for those taxes.
Property taxes & assessed value
If a homeowner decides not to pay property taxes while going through the foreclosure process, and you purchase the home in foreclosure, you are now responsible for the past taxes owed and the current taxes due.
One of the most common foreclosure homes tax issues concerns the assessed value of the home. This is not necessarily what you paid for the home, but rather what the tax assessor believes the house is worth. The assessor looks at the condition of the property, the value of nearby homes, the size of the lot and the overall size of the building. You might pay $75,000 for a house in foreclosure and expect the assessed value of the house to be roughly the same. If the assessor determines that the house is actually worth $100,000 or more, you face some serious tax repercussions. You are expected to pay property taxes on the value of the home, not on the price you paid for.
Some buyers who face other tax consequences of buying homes in foreclosure are those who buy a second home for use as a rental property. In such a case, you will not only pay property taxes on the house, but you are also responsible for declaring your income on that property, which can generate a taxable event as well.
If you don't have an accountant or a real estate professional versed in the intricacies of buying homes in foreclosure, you may want make finding one a top priority. QualitySmith can put you in contact with local real estate professionals who can assist you in your efforts to buy a home that’s right for you.