property tax bankruptcy

Why do my parents have to pay this tax?

Last year my parent’s home was foreclosed on. They moved and haven’t been doing too bad since. My father leased a semi and now they finally seem to be getting back on their feet. Today my mother tells me that because of the foreclosure they have to pay $25000 in tax. Why is this and how can this be? I just got over seeing my parents deal with huge financial problems, if they have to file for bankruptcy because of some stupid tax my father will lose his semi. He was so proud to be running his own little business, this will destroy my parents. I’ve seen them have to deal with so much over the last three years, I just cant stand to see this happen. Why would they have to pay tax on a property that was taken from them and then sold? They were not behind on taxes either, so I just dont understand. Please help.

I can only guess that your parents received a cancellation of debt due to the foreclosure. A cancelled debt is considered as ordinary income by the IRS. There is an exception to this if they were insolvent at the time that the debt was cancelled. If their total debts exceeded their total assets when the debt was cancelled they are considered insolvent and no income is recognized and no tax is due.

Your parents should consult with a CPA or tax attorney to see if they can get out of this situation. It should be pretty easy for a pro to clear this up quickly.

Property Tax

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