Dear Liz: A couple of years ago my fiance lost two investment properties due to the housing bust. One house was lost to foreclosure, and the other was sold in a short sale. He has delayed our wedding because of his fear of tax ramifications that would, in his mind, affect my clean record and good credit score. Is he right or is he just delaying our wedding for a bogus reason?
Answer: Let’s be generous and just assume your beloved is a bit misinformed.
Foreclosures and short sales of investment properties can indeed result in tax bills if the proceeds of the sale aren’t enough to cover the mortgage and the resulting deficiency is reported to the IRS. This “forgiven” debt typically would be treated as taxable income to the debtor, unless he or she was insolvent.
But debts incurred before marriage, including tax debts, are the sole responsibility of the person who incurred them. And since there’s no such thing as a “joint” credit report — each person has his or her own — these debts won’t appear on your credit records or affect your credit scores.
That’s not to say pre-marriage debts won’t affect you as a couple, since the money spent on repaying these bills won’t be available for your other, joint goals.
It’s not clear from your question, however, whether he is indeed facing tax bills as a result of losing these properties or simply fears that he might. Another possibility is that he may be sued over any debt that he owes his mortgage lenders. Consultations with a tax professional and perhaps with an attorney familiar with real estate law should help you both get the facts. After that, you jointly can get started on building a plan to deal with his liability, if any.
Of course, if he delays making those appointments, you’ll get a pretty clear answer to your question.