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Old 01-03-2013, 09:54 AM
 
151 posts, read 279,462 times
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This morning I'm on a break for a tax seminar on the new tax act passed in 2013. I'm a 25 year tax CPA with a masters degree in Taxation. I believe this information may be useful to some on this board.

The new tax act extended the exclusions for forgiveness of debt. This is good news. However, the banks have a practice which the presenter of my seminar emphasized.


Here is an example. You had a home in which the debt is far greater than the mortgage. You walked from the debt. Let's assume you did not receive a 1099 C (cancellation of debt information statement from the bank). Furthter assume you excluded the amount of forgiveness of debt income. Some banks are now coming after people whom they did not issue 1099C's to. Their position is as follows. They say the bank is divided into :

a tax division and a legal division. The legal division has decided to pursue the debt. So, many people might believe the issue is history. but this may not be the case


There are many nuances to these transactions, for example property with recourse financing and property without recourse financing. Also this part of the law can be confusing. This is all I can write now . my 20 minute break is over.
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Old 01-03-2013, 09:57 AM
 
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Thank you, oomph for sharing that information. Keep it up!
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Old 01-03-2013, 11:41 AM
 
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Quote:
Originally Posted by oomph View Post
They say the bank is divided into :

a tax division and a legal division. The legal division has decided to pursue the debt. So, many people might believe the issue is history. but this may not be the case
Good news! It is odd how society seems to rationalize mortgage debt default as socially acceptable, as compared to not paying for gas, food, or other merchandise. All forms of theft should have consequences.
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Old 01-03-2013, 11:58 AM
 
151 posts, read 279,462 times
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I'm indifferent morally. Morality is a completely separate discussion. When a client comes to me with facts which meet a special exclusion, for example the exclusion on the gain from the sale of his personal residence. I dont moralize this law is right or wrong. I think you may have charged the word, good, with your own moralizing. I apply the law as favorably as legally possible to reduce my clients' tax burden.

Last edited by oomph; 01-03-2013 at 12:21 PM..
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Old 01-03-2013, 01:09 PM
 
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That question is complex in NV.

If the normal non-judicial foreclosure the lender has 6 months to file an action for a deficiency judgement. Same for secondary liens.

If a judicial foreclosure a deficiency judgement may be obtained at the same time as the foreclosure.

A short sale for this purpose is a sale in lieu...and the six month period applies to both the first and secondary lien holders. The rule of course is don't do a short unless you clear all significant debts.

Some of this applies to investors but others not.
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Old 01-03-2013, 01:48 PM
 
151 posts, read 279,462 times
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The salient point , which may be emerging as a pattern, is banks are pursuing past transactions, which may have been subject to tax debt forgiveness. Many people who have refinanced, in the stack of papers they signed converted the financing from non recourse (i.e. the lender can only look to the property for satisfaction of the debt) to nonrecourse (i.e. the lender can pursue the borrower). This is just a general heads up about this matter. You certainly have to evaluate each case on its own facts and circumstances.
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Old 01-03-2013, 05:35 PM
 
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Thank you for the info.

I do believe homeowners who walk from their primary property are forgiven for any deficiency balance in foreclosure, deed in leui and short sale. The IRS does not consider this a 'giflt' and thus you are not taxed on it.

A vacation home or rental will have different rules regarding capital gains i this regard I believe.
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Old 01-03-2013, 05:52 PM
 
3,586 posts, read 6,528,686 times
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Quote:
Originally Posted by thomasdavie View Post
Thank you for the info.

I do believe homeowners who walk from their primary property are forgiven for any deficiency balance in foreclosure, deed in leui and short sale. The IRS does not consider this a 'giflt' and thus you are not taxed on it.

A vacation home or rental will have different rules regarding capital gains i this regard I believe.
Incorrect. Homeowners who "walk" away from their primary property are playing a big financial russian roulette game with the banks/investors who own the loans. Depending on state laws (some states like California have non-recourse loans where banks cannot file deficiency judgments); there could be a either a deficiency judgment or a cancellation of debt (1099 C form the loan holders will file with the IRS).

That's why it's better to try to negotiate with the banks via some type of short sale prior to "walking away" If you live in a recourse state and the banks do not "forgive the debt" via a 1099 C form they file with the IRS, the banks can legally go after and legally garnish your assets/wages. Yes this happened to my wife's college roommate where they were garnishing $500/month from her checking account in the state of Virginia until she finally said F that and declared BK on the 180K note they had a deficiency judgment against her in a foreclosure.
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Old 01-03-2013, 06:01 PM
 
3,586 posts, read 6,528,686 times
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Quote:
Originally Posted by oomph View Post
This morning I'm on a break for a tax seminar on the new tax act passed in 2013. I'm a 25 year tax CPA with a masters degree in Taxation. I believe this information may be useful to some on this board.

The new tax act extended the exclusions for forgiveness of debt. This is good news. However, the banks have a practice which the presenter of my seminar emphasized.


Here is an example. You had a home in which the debt is far greater than the mortgage. You walked from the debt. Let's assume you did not receive a 1099 C (cancellation of debt information statement from the bank). Furthter assume you excluded the amount of forgiveness of debt income. Some banks are now coming after people whom they did not issue 1099C's to. Their position is as follows. They say the bank is divided into :

a tax division and a legal division. The legal division has decided to pursue the debt. So, many people might believe the issue is history. but this may not be the case


There are many nuances to these transactions, for example property with recourse financing and property without recourse financing. Also this part of the law can be confusing. This is all I can write now . my 20 minute break is over.
If the banks do not issue a 1099 C (cancellation of debt) they can (depending on state laws) go after people who default on loans with a deficiency judgment.

Now if they filed a 1099 C with the IRS. They basically write off bad debt (obviously realize some tax savings with the bad debt). If they file a 1099 C, than the banks cannot file a deficiency judgment against you.

In essence, once the banks forgives your debt, they can't "double dip" and go after you with a deficiency judgment.

The Mortgage and Forgiveness act that was extended only applies to the tax ramifications with the "forgiven amount of debt" when the bank files a 1099 C.

I know it may sound confusing but it isn't. If bank "writes off 100K of bad debt". The bank is realizing about a 33K in "tax savings". Uncle Sam loses this revenue because the banks receive this tax benefit. To make Uncle Sam "whole again". Uncle Sam wants the person receiving the 1099 C to pay the "tax" on the amount forgiven. So the defaulting homeowner without the mortgage and forgiveness act would owe Uncle Sam roughly the same $33K in taxes to make Uncle Sam whole again.

Got that. So Uncle Sam losses a few billions of dollars each year this Mortgage and Forgiveness act is in place. A huge cost to taxpayers. The average American doesn't understand that.

Of course, people will say that people who need to short sale their homes can't afford to pay that 33K tax on the forgiven debt anyways. Well, that's why we have the insolvency clause. We don't need the mortgage and forgiveness act at all. Show the IRS you are insolvent and they will waive the tax regardless if the law was extended or not..
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Old 01-03-2013, 08:42 PM
 
426 posts, read 1,854,235 times
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Quote:
Originally Posted by aneftp View Post
Incorrect. Homeowners who "walk" away from their primary property are playing a big financial russian roulette game with the banks/investors who own the loans. Depending on state laws (some states like California have non-recourse loans where banks cannot file deficiency judgments); there could be a either a deficiency judgment or a cancellation of debt (1099 C form the loan holders will file with the IRS).

That's why it's better to try to negotiate with the banks via some type of short sale prior to "walking away" If you live in a recourse state and the banks do not "forgive the debt" via a 1099 C form they file with the IRS, the banks can legally go after and legally garnish your assets/wages. Yes this happened to my wife's college roommate where they were garnishing $500/month from her checking account in the state of Virginia until she finally said F that and declared BK on the 180K note they had a deficiency judgment against her in a foreclosure.
If its your primary residence, its not 'russian roulette' . Its a fact. No deficiency balance and the IRS will NOT consider it capital gains. Nationwide.

If you can show me the case law since 2009 where they do, then I would like to see it. Show the case law.
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