Foreclosures and tax law

[JS80]

I remember this vaguely from tax law in college...

So let's say someone buys a house for $700k with zero down, now the house is worth $500k so they walk away. Let's say the bank forecloses and is able to sell for $500k, so there is a $200k remaining loan balance. If they write that off, doesn't it become a "gain" to the person who loaned the money?

Will the IRS come after the people who do this or will Congress write a law that temporarily stays this? If they don't there will be a slew of BKs.

 

[Ns1]

cancellation of debt, 200k income to individual

I think congress is attempting something, not sure


Text

 

[Beattie]

Originally posted by: JS80
I remember this vaguely from tax law in college...

So let's say someone buys a house for $700k with zero down, now the house is worth $500k so they walk away. Let's say the bank forecloses and is able to sell for $500k, so there is a $200k remaining loan balance. If they write that off, doesn't it become a "gain" to the person who loaned the money?

Will the IRS come after the people who do this or will Congress write a law that temporarily stays this? If they don't there will be a slew of BKs.

No, it's a gain and is taxed as income to the person that was loaned the money. Not the loaner.

debt forgiveness = income.

 

[LuckyTaxi]

im going through this now. Probably won't know until next year but we walked away from a house (investment). The bank sold it but they're saying there's a lost for $72k BUT the settlement shows that it actually sold more than what we owe.
But yea, congress did pass something where the lenders have to write it off and you walk away free BUT that's only if it was a personal residence.

 

[kranky]

At the end of 2007 they passed a law that removed the tax liability for debt forgiveness on a foreclosure (primary residence only, not investment property or vacation home).

I'm going by memory so verify it if you need to be absolutely sure.