The moment you file bankruptcy in Las Vegas, a bankruptcy estate is created and all your non-exempt assets are placed into it. The bankruptcy court appoints a Trustee to administer the estate, which involves selling its assets and to pay off the creditors with the proceeds of the sale.
Most Americans don’t have much in the way of assets, but they sure have a lot of debts. True, they’ll own a house with a mortgage, cars secured with loans, and likely a large amount of credit card debt. In most consumer bankruptcies, the debtor is usually trying to discharge the unsecured credit card debt.
The good news for them is that this is usually doable without losing their homes because Nevada allows a hefty $125,000 homestead exemption, which means a lot of people can keep their houses out of their bankruptcies. Unfortunately, those who are unable to exempt their houses from their bankruptcy estates may suffer a loss due to tax issues.
One specific problem is the “exclusion of gain from sale.” In 1997, Congress passed the Taxpayer Relief Act, which changed the existing law to allow taxpayers to exclude up to $250,000 of appreciated home value from their income tax returns. In other words, if someone purchased a house for $100,000, lived in it for two of five years and then sold it for $150,000, the person could exclude the $50,000 difference from the capital gains portion of his or her return. This can save people a lot of money.
The problem, though, is that those who can’t exclude their homes from their bankruptcies will find that the Trustee will sell the houses, claim the exclusion of gain from sale on the bankruptcy estates’ income tax return, and then distribute the proceeds to the creditors. Is there a way for homeowners to keep the value of the exclusion of gain?
1.Most people’s houses have lost value in the last few years, so there will be little if any gain to exclude from sale.
2.Nevada’s homestead exemption is fairly generous, so most Las Vegas homeowners won’t worry about the Trustee exhausting the gain to satisfy creditors.
3.For the few who are able to claim a gain and still have unmanageable amounts of unsecured debt, one option is to delay bankruptcy to realize their gains first. This would involve selling the house, claiming the exclusion from gain, and using the gain for something else that is subject to a Nevada exemption, e.g. a smaller house. Again, the value of the gain and the amount of credit card debt would both have to be substantial to make the effort worthwhile.
Although it’s worthwhile to know the tax implications of one’s bankruptcy, in only the rarest circumstances do they play a significant role. The exclusion of gain from sale is one of those examples.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation by calling 702-903-1354.