There is a second wave of foreclosures that are in process now. People that can afford to pay their mortgage, but choose not to, because they are so upside down on their real estate that there is little or no possibility of recovery in the near future. One might term this a strategic foreclosure. They typically are short sales or deed in lieu of foreclosure transactions.
If you are considering one of these transactions, please consider it carefully with your tax adviser. If you pay less back to the bank than you borrowed, then you have income from debt relief. When you borrowed the money, it was not taxable. However, when you do not pay it back the portion that you short the lender by is income.
The next question you have to ask is whether the income is somehow excluded from taxation. The traditional relief comes under the code if you are either bankrupt or insolvent. Some relief may also be available if the home is your principal residence, or the debt was a purchase money loan. Your situation must be analyzed to determine if you fit within any of these exclusions. Otherwise, you have taxable income.
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