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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 11821
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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This is a series of related questions. Is it true that after

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This is a series of related questions. Is it true that after Jan. 1st, anyone who is foreclosed on will be taxed on the difference between what is owed on their home, and whatever the bank sells it for? Is that how it works? Is that what happened before, or have banks traditionally ignored going after people for the difference?

If this is counted as income, then is it counted as income for last year or next year?

How much of that will be taxed? On 100k for instance, since he is upside down by that much, how much could he expect to be taxed for?

Is there any way to push a foreclosure through ahead of the Dec. 2013 deadline?

He has been making the payments, is current, but it's not wise financially to keep paying for a house when he owes $187k on a house worth maybe only 87k to a contractor to tear down or flip. Forty years of deferred maintenance, inside smoker, and cats that have had their way in the house. This house needs new everything, and foundation work as well.

He will make about 87k in income this year, but only 30k in soc sec next year, or if he works the first six months of next year, about 58,6k. Would it be smarter to foreclose this year, before Dec. or next year since his income will be lower?

What is the likelihood of the forgiveness being extended through 2014?

What would you recommend? We are not interested in short sales, only foreclosure. Is there any way to do a foreclosure without hurting his excellent credit rating? He just paid off 60k in CC bills over the past 2.5 years.

Can they take his truck? (payments are made by corporation owned by the family)

Can they take his stock holdings? Is there any way to protect his income, savings, stocks?

Lane :

Hi ... lets take these one at a time IRS has ALWAYS taxes everyone on ALL "increase in net wealth," (the way the foundational law is actually worded) from gambling winnings (over and above losses) to the gains on sale of an asset (capital gains tax) to bartering income (trading a $1,000 motorcycle for a $5000 car, should be reported on a 1099b) SO whenever that bank or credit card issuer or any OTHER lender has actually forgiven the debt - ceased coming after you and written it off for themselves - IRS has always seen that net increase in wealth (borrowing money , having the use of it, and never paying it back) as income it was only with the debt relief act (2007) extended through 2013 that this has been waived in certain circumstances

Lane :

Make sense so far?

Lane :

In terms of foreclosing this year... It makes more sense regardless (we have no indication that the debt relief act will be extended further) and filing that 982 and being abe to completely exclude the income (forgiven debt) from taxation - regardless of tax bracket is a "bird in hand," for 2013 taxes

Lane :

In terms of pushing it forward, you could potentially petition the court ... but you may also want to ask the mortgage company about doing a "Deed in Lieu of Forclosure" which is also covered under the relief act ... (along with short sales)

Lane :

(...getting it done in 2013, better said)

Lane :

Now, regarding what the bank can take, that depends on whether the state is a re-course or non- recourse state:

Lane :

In a non-recourse mortgage state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.

Lane :

California is a non-recourse state:

Lane :

See this:

Lane :

Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statues do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property).
Note that in some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). Almost all HELOCs and home equity loans are considered recourse loans and lenders for these loans may sue borrowers to recoup loss. (Except in some cases where the second mortgage lender forces the foreclosure. See: HELOC Foreclosures). There has been some speculation that mortgage refinances do not constitute “purchase money” loans. However, there have been no cases to determine this issue one way or the other.

Anti-Deficiency / Non-Recourse States
North Carolina
North Dakota

One Action States
In some states, lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute:

New York

Lane :

Your last few questions about what they can take are answered by the fact that CA is a non-recourse state AND a one-action state ... The answer is No

Lane :

And finally, the fact that CA is a non-recourse state

Lane :

says that once the house is sold (regardless of whether they get enough from the house to pay off what is owed) they cannot come after you for the remaining debt

Lane :


Lane :

are you still with me?

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here) … Please let me know if you ave ANY questions at all.

Lane :

again, let me know

Lane :

I'll be here

Lane :





... just checking back in here, as I never saw you come into the chat


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Customer: replied 3 years ago.

Would IRS go back to the date of the refi in the 90s and charge penalties on the years between? How much of the original refi would they consider to be income?


It's FORGIVENESS of debt that is taxable.

A refi is just refinancing the debt (essentially re-writing the loan for the purpose of getting a lower rate OR taking out more money, or both). The amount is still owed.

It's only when there is a loan outstanding and that debt is forgiven (as in, OK you don't have to pay this back now) that there is income.

It's only when the bank is saying "you don't owe us any more" and were going to take our own write-off for the bad debt, that wealth is created for the borrower.

It's only at THAT point in time that the amount forgiven can even be ascertained.

Make sense?

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