When someone meets with me because their home may end up being foreclosed on, one of the things that I tell them is that they should meet with an accountant – a good one – sooner than later. Last year, people were concerned about whether the Mortgage Forgiveness Debt Relief Act would be renewed. The Mortgage Forgiveness Debt Relief Act applies to federal income taxes. In 2013, again, people are concerned about whether the federal act will be renewed. Uncertainty abounds.
Unfortunately, there is one thing that we are certain about at this point in time: a foreclosure in 2013 could be very painful on your Minnesota state taxes. According to this MPR article:
If you’ve recently been in foreclosure, the state may tax you. That’s because many people technically receive income when their lender sells the house for less than is owed on the mortgage.
If you think that you might be in that situation, my advice to you is to contact your accountant as soon as possible. You also might want to consult with an attorney.