The Mortgage Forgiveness Tax Questions

[Submersible]

We're considering foreclosure as an option for our house in California. It was financed with an 80/20 loan arrangement, zero down, interest only. The smaller HELOC loan was taken at the same time as the bigger loan, and 100% of the proceeds went into purchase of the house. We've lived in the house as our primary residence for 2 1/2 years.

My understanding from the IRS website is that the Debt Relief Act shields borrowers from taxes on income incurred through debt cancellation. However, the IRS also states that foreclosure on a house secured by non-recourse loans results in no income.

Am I right in thinking that if I move forward with foreclosure, I don't need to have it complete by the end of 2009 to take advantage of the act? It seems like the act is irrelevant for our situation. Thanks!

[pattona]

The HELOC could be considered as a recourse loan; if you are worried about it you should talk to a lawyer and a tax professional.

Perhaps more importantly, you need to see what CA does; it is not following the IRS rule although there is legislation in the works to forgive some kinds of mortgage debt.

[Submersible]

Thanks. I think my subject line got truncated. I'm wondering if the Mortgage Forgiveness Debt Relief Act of 2007 has any impact one way or another on a non-recourse loan vis a vis federal income taxes.

I'll definitely look into state taxes separately. I don't believe the HELOC could reasonably be construed as anything but a purchase money loan given the circumstances, but I'll look into that too.

[Moe Bedard]

You might find the answer that you are looking for here.............but if not, you might want to either call an accountant or the IRS for the answer to that question just to make sure...........

Mortgage Forgiveness Debt Relief Act

[Submersible]

Thanks. That seems to be saying that the Mortgage Forgiveness Debt Relief Act of 2007 has no application at all to a non-recourse loan. The only reason I'm trying to figure this out is to determine if I really have a deadline of the end of 2009 to complete foreclosure, or if I can afford to wait until Q2 or Q3 of 2009 to start. I'll probably end up asking an attorney.

[Moe Bedard]

Sorry..........I am not sure of that one.........as those California rulings are fairly new......and the debt forgiveness act came after......if you wouldn't mind could you please post what you find out in regard to that info............

[pattona]

It looks like CA passed legislation on mortgage forgiveness for 2007 & 2008. Does anyone know if they are considering extending it through 2009?

[Moe Bedard]

Hi pattona,

I believe they posted some info over in the Deed in Lieu section of the forum on some tax discussion regarding California.

[pattona]

***,

Here is the thread that I found but it doesn't answer my question.

Tax Planning for 2009

I suspect Prof Shays would know. I should probably post a new thread but what forum do you recommend?

[Moe Bedard]

the one where the Professor hangs out........
the deed in lieu/walking away forum.