Watchhttp://money.cnn.com/2012/11/07/real_estate/mortgage-forgiveness-tax-break/index.html
If the Mortgage Forgiveness Debt Relief Act of 2007 does not get extended by Congress by the end of the year, homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.
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Bellingham, WA
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Good ol' lamestream media being incorrect.
iwog can correct me, but if there's no judgement possible (as in purchase-money loans and liens), there is no actual loan forgiveness to be taxed.
Title to the house just goes back to the beneficiary and that's the end of it, other than the ding to FICO and associated credit penalties.
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Tarzana, CA
LOL, love the real headline using correct English term 'homedebtors'.
Hmm, this in itself is reason not to rush on any foreclosure.
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Mountain View, CA
bmwman91's website
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At this point, I would be super surprised if this "temporary" relief measure was ever repealed. I think that Webster needs to add a second definition for "temporary" for cases when the federal government uses it.
"Temporary (adjective). When used by any government official, see also 'permanent'."
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Bellingham Bill says
Bill, you're correct for non-recourse states. However, there are 37 states that don't have non-recourse so the tax liability is very real. I heard that the Bill was passed in the Senate and just needed to get approved in Congress. It will happen and will be extended to December 2014.
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bmwman91 says
Yes.. thats about right.
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bmwman91's website
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thomaswong.1986 says
I forgot one other one:
"see also: slumming for votes"
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Scottsdale, AZ
robertoaribas's website
the misinformation on this thread is stunning.
First off, even if your state is non recourse, like Arizona, you actually can and will owe the tax depending on your conditions. If the law is not extended (not repealed as posted above, the original law ended the end of this year)
even so, the law only provided tax forgiveness on your resident property, or on investment property if you were insolvent at the time of the foreclosure/short sale. I know people who let the investment properties go first, since that way they were still insolvent due to owing so much on their primary residence, and after all the investments were gone, let the primary residence go.
do not use any of this for personal advice, seek the help of a competent real estate/tax attorney for your own situation, this law is complex, and mistakes could be very expensive to you!
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robertoaribas says
Word!
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"In Arizona, this would mean you would not be subject to taxation for any deficiency between the property value and mortgage balance after a deed in lieu on a one or two-unit building so long as the loan or loans were taken out to purchase the property."
http://www.ehow.com/info_8764177_there-tax-liability-deedinlieu-arizona.html
?
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Troy,
Thank you for providing the link.
Roberto, any other misinformation? :)
I used to think that was the case, but wanted to be sure so I dove into it and found out that wasn't the case. :)
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Scottsdale, AZ
robertoaribas's website
E-man says
Actually, that link COMPLETELY AGREES with what I said. The deficiency is taxable, whether or not the lender can pursue it, except for our current tax law which is set to expire.
the next time you care to call something I post misinformation, make sure you actually understand what you are reading. I don't want to call you stupid since patrick seems to get upset about that, but honestly, insulting me by calling my post "misinformation" while quoting a link that agrees with my post... well, not sure what else to call that.
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robertoaribas says
no, that's not what it says:
"Unless your debt falls into either an exception to or exemption from the IRS debt rules, you will be taxed on the value of any unpaid debt after a deed-in-lieu, in Arizona or any other state. One key exception to the taxation rule, according to the IRS, is non-recourse loans. Because a non-recourse loan prevents personal liability beyond the property itself, any unpaid debt is not viewed as income."
This is just my general understanding, that non-recourse loan defaults are not taxable income since there can be no deficiency judgment with them.
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Roberto,
You're welcome to call me stupid if I'm wrong. I didn't read the link Troy provided since I know he typically does his homework.
I remember reading it before that for purchase money loan in a non-recourse state, there is no deficiency and there's no tax consequences. I will have to read it again, but isn't that what non-recourse loan means?
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Scottsdale, AZ
robertoaribas's website
E-man, there is no deficiency. True, but you aren't taxed on deficiency, you are taxed on FORGIVENESS OF DEBT, and there absolutely is forgiveness of debt.
However, there have been many ways out of this tax, hence my earlier post. Even the current law only protected owner occupied homes, and investment homes if the investor was insolvent at the time of the forgiveness... Thus the importance of getting rid of properties in the right order. If you get foreclosed on an investment first, and you have tons of negative equity on your personal residence, you are insolvent.... do it the other way around, and the negative equity is gone, hence when the investment property foreclosures, you are solvent, and can possibly be taxed on the forgiveness...
And let me stress, every situation is different. I wouldn't handle a client for ANY of these deals, without competent legal advice first.
http://www.shortsalene.com/2007-mortgage-relief-must-get-act-extended/
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Roberto,
Originally I thought you would be taxed on the forgiveness of the debt. However, when I read it, it said you won't be taxed on the forgiveness of the debt. That's the reason why I remember it vividly.
You might be taxed on the forgiveness of debt on recourse state. I'll have to verify it again. When it comes to this kind of issue, you'd have to tell the client to consult with a CPA or tax attorney. No reason to get yourself in hot water because that's not your area of expertise.
Anyways, we signed docs for another property today. It's scheduled to close on Monday. Got a good deal with some built-in equity right off the bat.
Good investing. :)
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Scottsdale, AZ
robertoaribas's website
E-man says
congrats to you! What I know about tax deficiency, I only know generally. I ALWAYS insist that a client see a lawyer about these issues, and I really don't want to be involved in it; I'm not going to advice a course of action, that is what the lawyer is paid to do.
Something I'm curious about: How can you be taxed if the bank is pursing the deficiency? if they are still getting their money someday, there is no forgiveness, and hence no income. I think the bank would have to write it off as lost, before you could be taxed, but obviously, as AZ is a non deficiency state (generally speaking...) I have no first hand experience with that.
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robertoaribas says
The bank's 1099-C to the borrower signals the change of pursuers from bank to IRS (if box 5 is checked)
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Clinton, MA
Bellingham Bill says
Wouldn't a 1099-C indicate to you, to the world and whoever it is in the town hall that removes the lien that the bank has STOPPED pursuing?