Home Forclosure

[Janitor Bob]

A client just informed me that they went through a forclosure and that their home is now owned by HUD and they are wondering what affect, if any, it will have on their federal income taxes....Is there any tax consequences to my client? I have never personally dealt with this before.

Foreclosure was finalized in 2007

[Tax Prep by Deb]

A client just informed me that they went through a forclosure and that their home is now owned by HUD and they are wondering what affect, if any, it will have on their federal income taxes....Is there any tax consequences to my client? I have never personally dealt with this before.

Foreclosure was finalized in 2008

Here's an article I dug up. It appears that perhaps with the passing of this new bill, your clients will be O.K.

http://www.realestateinvestingtax.com/shortsale.shtml

Deb!

[Janitor Bob]

Here's an article I dug up. It appears that perhaps with the passing of this new bill, your clients will be O.K.

http://www.realestateinvestingtax.com/shortsale.shtml

Deb!

Has this new bill passed?

[Kea]

Has this new bill passed?

Yes, it passed last month.

[RoyDaleOne]

"Cancellation of debt income may not be taxable if the debtor is insolvent"

Sounds like your client would have been insolvent at the time of foreclosure.

Insolvent - unable to pay your bills at the time due.

[jainen]

>>with the passing of this new bill, your clients will be O.K.<<

How can we say this without first asking what sort of mortgage was foreclosed? There is far too much misplaced joy in the tax industry about this new law. The biggest issue is that it only applies to ACQUISITION debt. The original purchase mortgage was probably non-recourse anyway, so nothing changes there.

Refinanced debt is potentially applicable, but that is so often combined with cash-out equity debt that many taxpayers are still going to be hit with taxable relief of debt. (By the way, have you seen any guidance on how that will be calculated? Does the bank write down the equity portion, the refinanced purchase money, or some ratio of the two?)

The new rule is mostly for clients who bought a new home in the last two years that has experienced a drop in value greater than their down payment. That is certainly not everyone. Of course, the old rules about non-recourse debt, bankruptcy and insolvency still apply. But note that "unable to pay your bills at the time due" is NOT the definition of insolvency. Paying bills is a matter of cash flow. Insolvency concerns net worth.

[RoyDaleOne]

Insolvent is the state of not being able to pay one's debts as they fall due, or having an excess of liabilities over assets.

However, for federal income tax purposes only the excess of liabilities over assets test is used.

(3) INSOLVENT

For purposes of this section, the term "insolvent" means the excess

of liabilities over the fair market value of assets. With respect to

any discharge, whether or not the taxpayer is insolvent, and the

amount by which the taxpayer is insolvent, shall be determined on the

basis of the taxpayer's assets and liabilities immediately before the

discharge.

Section 108

jainen is correct.

[Tax Prep by Deb]

>>with the passing of this new bill, your clients will be O.K.<<

How can we say this without first asking what sort of mortgage was foreclosed? There is far too much misplaced joy in the tax industry about this new law. The biggest issue is that it only applies to ACQUISITION debt. The original purchase mortgage was probably non-recourse anyway, so nothing changes there.

Refinanced debt is potentially applicable, but that is so often combined with cash-out equity debt that many taxpayers are still going to be hit with taxable relief of debt. (By the way, have you seen any guidance on how that will be calculated? Does the bank write down the equity portion, the refinanced purchase money, or some ratio of the two?)

The new rule is mostly for clients who bought a new home in the last two years that has experienced a drop in value greater than their down payment. That is certainly not everyone. Of course, the old rules about non-recourse debt, bankruptcy and insolvency still apply. But note that "unable to pay your bills at the time due" is NOT the definition of insolvency. Paying bills is a matter of cash flow. Insolvency concerns net worth.

Jainen,

You are absolutely right, and I guess I should have been more specific with my point. When I researched this issue initially it was for a client who had purchased his home and never re-financed it. I will try to be more specific in my future posts.!

Deb!

[Janitor Bob]

Jainen,

You are absolutely right, and I guess I should have been more specific with my point. When I researched this issue initially it was for a client who had purchased his home and never re-financed it. I will try to be more specific in my future posts.!

Deb!

Single Dad...you had one of these last year...how did you handle it? In this case, clients are still living in the home...it is just owned by HUD and not them

[Single Dad]

Single Dad...you had one of these last year...how did you handle it? In this case, clients are still living in the home...it is just owned by HUD and not them

My client was totally insolvent "at the time of foreclosure" and as I recall in bankruptcy proceedings. In my case the income was not taxable due to insolvency.

Dig really deep on this one, as the rules have changed and if I'm not mistaking there were some tax cases on this same issue as well.

Single Dad

[Janitor Bob]

My client was totally insolvent "at the time of foreclosure" and as I recall in bankruptcy proceedings. In my case the income was not taxable due to insolvency.

Dig really deep on this one, as the rules have changed and if I'm not mistaking there were some tax cases on this same issue as well.

Single Dad

The debt was non-recourse and client never re-financed...So debt was secured by the property only and buyer is not personally liable for the balance...thus no debt forgiveness...thus no taxable income...correct?

[Janitor Bob]

The debt was non-recourse and client never re-financed...So debt was secured by the property only and buyer is not personally liable for the balance...thus no debt forgiveness...thus no taxable income...correct?

The debt was non-recourse and client never re-financed...So debt was secured by the property only and buyer is not personally liable for the balance...thus no debt forgiveness...thus no taxable income...correct?

[RoyDaleOne]

Pub 523

FORECLOSURE OR REPOSSESSION. If your home was foreclosed on or

repossessed, you have a sale.

You figure the gain or loss from the sale in generally the same way as

gain or loss from any sale. But the selling price of your home used to

figure the amount of your gain or loss depends, in part, on whether you

were personally liable for repaying the debt secured by the home, as shown

in the following chart.

IF YOU WERE... THEN YOUR SELLING PRICE INCLUDES...

-------------- -----------------------------------

NOT personally the full amount of debt canceled by the

liable for the debt foreclosure or repossession.

personally liable the amount of canceled debt up to the

for the debt home's fair market value. You may also

have ordinary income, as explained next.

This from 2006 Pub.