Home is where the debt is?

October 9, 2007 8:30 PM

I'm a woman, divorced, being audited by the IRS, in some credit card debt and have problems with my rental history. Should I sell my home?

I got divorced last year after 10 years with my ex, who was an irresponsible mess. We are now being audited by the IRS for the tax year 2005. I moved out of our marital home in October of 2005 after finding out that my ex was smoking meth on a daily basis. Understandably, I was upset and moved in with a friend, then on to an apartment with another friend.

I refinanced the house to pay off my ex, since he is frequently jobless, in multiple tens of thousands of dollars in debt, and addicted to meth. I assumed it would be doable and budgeted accordingly. Then when I changed my filing status at work from married to single, my income went down $300/month. Okay, living close to the bone, but doable. A series of home and car repairs and illnesses later, and I have acquired $5000 in credit card debt. It is a zero interest card for the next year, so again, able to catch up, right?

Now the IRS suddenly audits my taxes. It seems ex-husband told me I could deduct his business expenses as they were part of his income. According to his former employer and the IRS, they were not. Ergo, we owe taxes on $17,000 now and will most likely be audited for 2006 as well.

I have no records showing that I lived anywhere but my actual home until January 4, 2006. The friend whose apartment I moved into decided to break her lease the day after I moved out and back into my marital home during my divorce in 2006. I am being named in a lawsuit alongside said friend (now former, by the way) by the apartment building people, so I cannot ask them to give me documents showing that I moved in there in December of 2005 since they are trying to collect a debt from me, even though I didn't break the lease (turned in keys, parking pass, etc. the day before, but was told I didn't need any documentation to take myself off the lease and trusted former friend to be responsible). The leasing office called me the next week and accused me of collusion, which I denied, and refused to remove me from the lease at that point, even though I had paid all funds and turned in everything prior to said friend "moving out suddenly in the middle of the night." Guess what? Said friend also did meth with my ex and also has no income or assets.

I refinanced my home to pay off my ex; the house now appraises at $18,000 less than it did last year when I got the loan. So, technically, I am $18k in the hole already if I should try to sell it in the soft market. Not a good position.

I have spoken with other friends in the same position (i.e., divorced from a jobless spouse and being audited) and am aware of Innocent Spouse. I am in the process of getting together as much paperwork as I can to show that since the items in question are HIS business expenses, and I believed I was filing correctly, and that we separated that year as a result of his drug abuse and my emotional distress (which I believe counts as spousal abuse in the eyes of the IRS). However, even if I claim Innocent Spouse and it is granted, if my ex has no income or assets to seize, I have reason to believe that the IRS will seize my home as a material asset for the monies owed.

Should I try now to begin the process of selling my home? Even if I sell it at a loss, which I almost certainly will, it would free up monthly income I could put aside to face the impending IRS debt. I am worried if I do put the home up and manage to sell it, the supposed $2000 I owe from the bad-friend-apartment-deal will stop me from finding a place to live.

I'm faced with so much stress and paperwork and the clock is ticking. Sell or keep the house? I helped design and build it in 2003, so it is newish, and has immense sentimental value to me. It's also 15 minutes from my office. I am due a raise in February of an unknown amount which may make the difference in affording the house and paying off my debt, but for now, all I see is debt and veiled threats and am afraid that if I don't cut my losses I will regret it. I live in Texas, by the way.

posted by anonymous to home & garden (14 comments total)

You need to talk to someone about this who knows what they're talking about. A tax attorney would be a good start.

The IRS has an info line that you can call; they might be able to give you a general sense of whether you could arrange a payment plan with them to enable you to keep the house.
posted by LobsterMitten at 8:36 PM on October 9, 2007

Anonymous, there's also the Taxpayer Advocate Line.

And, as someone else who is in deep with the IRS, you've got my sympathies.
posted by SpecialK at 9:00 PM on October 9, 2007

Consider doing what you can to arrange a payment plan with the IRS — they seem to care less how they get their money than that they get it.

Have you thought about renting out part of your house? Why sell now if the market is weak? You could think about renting now and selling later when the market is stronger.
posted by Blazecock Pileon at 9:13 PM on October 9, 2007

A few suggestions:

1) Talk to a credit counselor. (Find a real, non-profit, non-scam one. somebody here might know how to find those.)

2) Make payment arrangements with the IRS. Get somebody to help you with this. Tax on $15k should only be a few thousand dollars. Spread out over a long period, that's manageable.

3) Work on a budget, once you know what the IRS payments are. Live by it. Get rid of the plastic, including the 0% stuff. Maybe try it again someday when you're not so close to the edge.

4) Get a second job. It's not fun, but you'll be a lot less stressed if you have no significant debt, a few months of expenses in the bank, and some money headed into a retirement account.
posted by Tacos Are Pretty Great at 9:20 PM on October 9, 2007

First, take a deep breath.

When we feel like life is going to hell in the handbasket express, I think the stress and anxiety of the situation often makes us make big, drastic, and often unnecessary or illogical decisions.

I see three actionable issues. It'll be easier to tackle them one by one than by trying to deal with the stress of all three at once.

A) Dealing with the IRS. I second and third the advice of others here--your best bet is getting professional advice from a tax attorney, an accountant, a non-profit credit/debt agency or the like. If you do end up owing the IRS, they should be able to get you on a payment plan that doesn't bankrupt you in the meantime.

B) Dealing with the lawsuit. I was in a similar situation over $1,000, where I was definitely "right" and the 'friend' was definitely psycho, and I spent a month or more fighting back and forth, threatening lawsuits, having nasty lawyer threat letters written back and forth, the whole bit. At the end of the day though, I probably wasn't going to win the fight from a legal perspective and it would have cost me more time and money to defend myself. So, with a lot of reluctance, I caved and just paid out the money. And, it sucked. But you know what? I'm done and over the whole situation now, and have been for some time. I still *know* I was right, and what goes around comes around--she'll get hers eventually. In the meantime, I'm not spending my emotional energy and my time dealing with her.

What's my point? Your time and mental well being have a value far beyond the $2k you owe the apartment complex. I'd suck it up and pay the money and close this chapter of your life and move on.

C) Dealing with the Credit Card Debt. Don't worry about this until you've taken care of A & B. You have time. When you are able, make a plan and deal with it.

The way I see it, your house doesn't really factor in to any of these problems, at least not until you find out what, if anything, you owe the IRS and how they are going to make you pay it back. I had some serious medical bills in the past and I was avoiding paying them because I was so scared I'd end up having to move back in with my parents to pay them off. When I finally called and made payment arrangements, their recommended monthly payment amount was HUNDREDS of dollars less than I thought I'd be, and was totally doable on my existing income. Don't make any drastic moves on the house, especially as it's going to probably put you in a more difficult financial situation given your recent refinancing & appraisal.

It's really hard to tackle problems when you accumulate all of them at once, especially when you are adding in the emotional tolls of your divorce and your friend's betrayal. Take it one step at a time. You can do it.
posted by batcrazy at 9:38 PM on October 9, 2007 [1 favorite]

I'm not going to pretend to be an expert on finances, being audited, or debt, but there's already been and will undoubtedly be a lot of good advice given in this thread.

Correct me if I'm wrong, but it sounds as though you have friends and could use a bit of emotional support. Take advantage of anyone that'll lend an ear or a hand. You deserve it. You sound like, despite the messes involving your ex, the IRS, and other assorted hardships, that you have a good head on your shoulders, understand the importance of responsibility, and have the ability to work through this.

Meth is an awful drug, worse than heroin, worse than crack. You likely know this by now. My heart hurts for you for what you've been through.
posted by Item at 10:14 PM on October 9, 2007 [1 favorite]

Anon just emailed me to ask if I'd share this address for off-site answers & suggestions:

[e-mail]
posted by Item at 10:27 PM on October 9, 2007

As previously recommended, do talk to a professional about this. But if you end up owing the IRS, it won't be as scary as you're thinking now. I was in a similar boat a few years back, and kept dodging their calls and letters because I was scared to death. When I finally bit the bullet and talked to an IRS rep in person, she cheerfully set up a reasonable payment plan for me. They don't really care how much you pay per month, as long as you're consistent and on time. I was able to pay $50 per month for the first year, and once I started getting back on my feet, I was able to increase the payments.

Good luck to you!
posted by Oriole Adams at 10:31 PM on October 9, 2007

Talk to the IRS. They are surprisingly reasonable and generally willing to help you out. Find your local office and go in person.
posted by fshgrl at 10:38 PM on October 9, 2007

Surprisingly reasonable... given their expectations and massive requirements warrant a degree to understand....

this is just one more reason we need a fairtax. A tax based on CONSUMPTION, not production.

As for your main question I think selling the house only makes sense if the final profit from this whole mess bails you out. If it does not then I would sit on it like a brick, if it does, realize that its time to move on from this step of your life and so many great things can happen in a new environment without the stress of this debt on your head.

Good luck.
posted by crewshell at 6:05 AM on October 10, 2007

They are surprisingly reasonable and generally willing to help you out.

This has been my experience, you get a big scary bill for money due, you grovel with the help of an accountant and work something out. Do not just pay it. They don't expect you to. You being homeless will not generate any taxes in the long run.
posted by StickyCarpet at 7:43 AM on October 10, 2007

- Paying Off the Ex- The money you gave to the ex- is gone. Don't look back.

- Rental Trouble Write a letter to the rental people documenting your departure experience. Then keep sending copies of that letter. You might get dinged by them eventually, but put it on the back burner. Your local legal aid office may be able to help; they are experts in landlord-tenant law.

- Credit Card Debt Keep rolling it over into 0 interest cards as long as possible. Unless you have significant additional unsecured debt, this is manageable.

- Tax Liability Top Priority If you both signed the tax return, the tax burden is shared, but he's a deadbeat, so they'll look to you for payment. However, do check to see if he has assets and can contribute., and maybe the Innocent Spouse regs will help. Talk to the IRS and consider getting a lawyer.

- Equity gained and lost as the real estate market changes is unavoidable. You might sell today and realize that you thereby avoided a bigger equity loss down the road. Or you might sell and lose out on a bigger equity gain. The real estate market is extremely local. Many areas are likely to see values decrease; some areas may see increases, it's all speculative.

Look at the current value of the house and the amount you have spent on it. If it has gained in value, and you sell it without buying another house, you may owe taxes. You will also lose the tax deduction value of the interest.

You love the house, so if you can keep it, I'd try. Can you get a roommate to help defray costs? Any collectibles you can sell on ebay, or stuff you can sell on craigslist?

You are overwhelmed with bad news and loss. Keep taking deep breaths, and deal with problems individually. You might find that metachat.org is a good place to hang out - the bunnies are warm and fuzzy, and are very good to one another. Good luck.
posted by theora55 at 8:55 AM on October 10, 2007

If you sell now, it'll just exacerbate your tax bill worries.

a) In the current market, with prices still trending down and 12-18 month backlogs getting common, it takes deep price cuts to get a buyer to even look at your house much less bid. So if you committed to selling now, it could easily take a $50-100k hit to get a sale closed. When you sell for less than the value of the mortgage, you get taxed on the difference "forgiven" by the lender. And because the forgiven debt is taxed as if that were cash handed to you, it'll likely push you into a much higher tax bracket than you're used to.

b) You'll be giving up your mortgage interest deduction, which for many people is their biggest deduction. Like the divorce, the effect is more witholding without any new resources to offset it.
posted by nakedcodemonkey at 12:26 PM on October 10, 2007

The 50k - 100k is pretty subjective and based on no real fact givening that we don't know where exactly the house is, the value of the home, the surrounding real estate market and the like... I think theora55 was pretty dead on.
posted by crewshell at 3:14 PM on October 11, 2007