How to Deduct Legal Fees Due to Foreclosure

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Going through a foreclosure isn't easy. It means losing one of your most prized possessions, your home. Legal fees from foreclosures usually cannot be deducted. The Internal Revenue Service (IRS) does provide some relief to homeowners who have gone through foreclosure. Some legal-fee deductions may be helpful.

Get Your Documents and Forms in Order

Understand the tax code. Deductions related to foreclosures are not specifically listed, but legal and professional services fees are. Review your documents to determine whether your fees constitute a deductible loss or a personal expense which is non-deductible.

Read IRS Publication 529. This lists the types of legal fee deductions and explains the definitions of allowable deductions. For example, legal fees related to getting tax advice or how to handle foreclosure expenses are deductible.

Review the IRS special rule for foreclosures. An entire section on the IRS website, "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation," is dedicated to it. Though not specifically a legal fee deduction, the IRS gave tax relief to homeowners going through foreclosure. Some of the lost home value and fees are viewed as loss of income and can be deducted.

Gather the correct tax forms. Whether deducting legal fees or using the special foreclosure rule, you will need Form 1040, Schedule A. This is the form for itemized deductions, along with the schedule that explains them.

Get help if you need it. Don't be afraid to call the IRS taxpayer hotline, 800-829-1040, or a help center. Both office free advice to taxpayers. You can find the nearest help center by going to the IRS website and clicking "Contact my local office".

Tips

  • Go to the IRS website and read the various publications on foreclosures before starting your tax return. It will help you understand the agency's policy.

Warnings

  • Pay close attention when filling out the deductions section of the tax form. Miscalculating fees or putting items on the wrong lines can result in an audit.