People who file New York bankruptcies often have a lot of credit card debt, auto debt secured by their cars, and mortgage debt. Some people, though, own their houses outright or at least have significant equity in them. In these circumstances, the equity can be placed into the bankruptcy estate and sold to the creditors to satisfy debts. Fortunately, New York has fairly large homestead exemptions that protect home values: $150,000 for properties in Nassau, Suffolk, Kings, Queens, Bronx, Richmond, Rockland, Westchester, and Putnam counties; $125,000 for homes in Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster counties, and $75,000 in the rest of the state.
For those who can’t fit all their home’s value into an exemption—and keep it out of the bankruptcy estate—they may lose money due a tax issue called the “exclusion of gain from sale.” Congress created this exclusion in the 1997 Taxpayer Relief Act, which allows taxpayers to exclude up to $250,000 of appreciated home value from their income tax returns. This means that if you bought a home at $200,000 and sold it for $500,000, you would be able to claim $250,000 in the exclusion.
Bankruptcy trustees know this too, and they will use it to the creditors’ benefit because they file the bankruptcy estate’s income tax returns. Saved money from income tax goes to the creditors and to the Trustee’s commission. So how can one avoid losing the exclusion?
There aren’t many options. One, obviously, the real estate bubble that popped a few years ago probably means most landowners in bankruptcy won’t have much “gain from sale” to exclude. Two, New York’s homestead exemption is fairly generous, so it’s unlikely that debtors will lose much money. Three, in the situation in which someone is able to claim a gain from sale yet still have large amounts of unsecured debts, the only viable option is to sell the house and use the excluded gain to purchase something else that’s subject to an exclusion.
It’s worthwhile to know the tax implications of a New York bankruptcy, but they don’t play a significant role in most cases. When they do, it’s important to have an experienced New York bankruptcy attorney to help you through the process.
For more questions about the tax implications of bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.
