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If you are going to Default/Walkaway/Let it Foreclose WITHOUT a bankruptcy....Time is running out! Tax forgiveness on unpaid debt expires in 2012.

By PockyClipsNow follow PockyClipsNow   2011 Jun 28, 10:00am 6,135 views   28 comments   watch   nsfw   quote   share    


Any debt that is 'defaulted on' is normally counted by the IRS as 'taxable income' UNLESS you go BK - per the IRS. UNLESS YOU DO IT BY 2012.

If you are underwater 200k, the bank might take a 300k loss on your house....THEN the IRS will want 100k in taxes if you are in the 33% tax bracket since the 300k loss by the bank will be counted as YOUR INCOME.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

http://www.irs.gov/individuals/article/0,,id=179414,00.html

The president signed this law in 2007 allowing everyone to default on principal residence debt and keep the money TAX FREE if they default between 2007 and 2012. (so you keep the Mercedes, the bmw, and the plastic surgery....all thats free $ and tax free on top of it. If you never pulled out equity from your house and are still underwater you are still screwed and this still applies to you having to pay tax on your defaulted debt in 2013 or after!).

If the lender is going to 'write off' your loan they will have to do it in 2012 or sooner.....but its not up to you when they write it off, I think they can only do that AFTER they foreclose (which is why we have staggeringly high shadow inventory?).

If you stop making payments today - it might already be too late due to average foreclosure takes 2 years!

Should everyone hurry up and default who is going to default eventually or anyway? It seems like that was the plan to cram these defaults into a six year jubilee of forgiveness. After that its debtor prison, bankruptcy, or you pay up.

Yes we still have debtors prison, Wesley Snipes owed the IRS $ and he is in jail. How many FB's will join him? If I was underwater I would stop making payments NOW and beg beg beg the mortgage company to accelerate my foreclosure (best way might be to cuss them out every time they call - you might want to do this anyway - lol).

Joe 6 pack won't even know about this law. But the 'high end' buyers will have accountants who will probably advise default asap.

I predict further price declines in high end in 2012/13 due to:
1. Underwater loan owners defaulting in mass from now thru 2012 due to this law.
2. conforming loan limits go from 729 to 625 as of october 2011.
3. *insert all other reasons for prices to tank here*

This is not advice..... talk to a lawyer!

#housing

1   FortWayne   ignore (4)   2011 Jun 28, 10:29am     ↓ dislike (2)   quote   flag        

This does explain all the postponing of the markets in the past few years.

2   PockyClipsNow   ignore (0)   2011 Jun 28, 10:37am     ↓ dislike (2)   quote   flag        

I wonder - does this explain extend and pretend, at least in part?

If the bank writes off your foreclosure on thier 2012 'tax return' you are forgiven.

If the bank writes off your foreclosure on thier 2013 or after tax return YOU MIGHT PAY ALL TAXES ON THE UNDERWATER AMOUNT! (or declare BK? Or prove insovlency?)

How the hell can anyone own or invest in real estate in this crazy house with all the changing laws/mortgages/prices/market crashing? I give up!

3   bubblesitter   ignore (0)   2011 Jun 28, 1:10pm     ↓ dislike (1)   quote   flag        

I bet congress is going to extend it beyond 2012.

4   StoutFiles   ignore (0)   2011 Jun 28, 9:54pm     ↓ dislike (1)   quote   flag        

I wish this would happen, **** the people who pulled money out of their mansion and then walked away. Since it's getting close to election time though, it's more likely it will be extended, but it definitely shouldn't.

5   Norbecker   ignore (0)   2011 Jun 28, 10:53pm     ↓ dislike (0)   quote   flag        

Now I know how all my neighbors got new cars, remodeled kitchens, all the latest toys and just seemed to have way more money then me. I was just too cheap to do anything to increase my mortgage principal. I though I was being smart with my finances. Now i know better. Follow the heard. Spend more then I make any way I can. Don't worry about paying it off big brother will make laws to help me and my fellow breeders. Free housing, SUV's, plasma TV's and millionaire lifestyles for all. Is this a great country or what?

6   bubblesitter   ignore (0)   2011 Jun 28, 11:50pm     ↓ dislike (1)   quote   flag        

Norbecker says

Free housing, SUV’s, plasma TV’s and millionaire lifestyles for all. Is this a great country or what?

For how long will it be that way? Forever? I doubt it.

7   StoutFiles   ignore (0)   2011 Jun 29, 12:49am     ↓ dislike (1)   quote   flag        

bubblesitter says

For how long will it be that way? Forever? I doubt it.

Not much longer. Then everyone will complain that this country has gone to shit; that people whose work could easily be cut or outsourced lived lives that people in other countries could only dream about. Housing bubble? More like the entire economy is a bubble.

We live in a global economy now more than ever. At some point our standard of living is going to have to match what we produce, which other than food, isn't much.

8   bubblesitter   ignore (0)   2011 Jun 29, 12:52am     ↓ dislike (0)   quote   flag        

StoutFiles says

our standard of living is going to have to match what we produce, which other than food, isn’t much.

Very true. All of us will have a mansion worth a million $ but it will have no value against any currency of the world - Zimbabwe style. :)

9   FortWayne   ignore (4)   2011 Jun 29, 12:54am     ↓ dislike (2)   quote   flag        

bubblesitter says

I bet congress is going to extend it beyond 2012.

unlikely, lately they've been fighting day and night to keep people in debt.

10   bubblesitter   ignore (0)   2011 Jun 29, 1:16am     ↓ dislike (1)   quote   flag        

EMan says

unlikely, lately they’ve been fighting day and night to keep people in debt.

LOL.

11   PockyClipsNow   ignore (0)   2011 Jun 29, 2:58am     ↓ dislike (1)   quote   flag        

I have brought up this topic since I have been looking at lots of foreclosures lately and there are two types:the bubble buyers (who may have gotten a HELOC also and defaulted).

Then there are the pre bubble buyers, many of whom pulled out MILLIONS from one Mansion. Crappy starter home/condo was only able to pull out hundreds of thousands in CA in free HELOC money.

One I looked at they paid 1.8 in 06 with like 5% down payment - and pulled out 750k in 07 then default. That 750k never has to be paid back, is not taxed, and no creditors will hound them, no bankruptcy is needed, they dont have to hide assets or anything. ITS CRAZY, all the rules are thrown out!

Multiply this by millions of properties and we have a whole generation of 'bank robbers' who got off clean and can now use that money to pay cash for a house (if they still have it).

Anyway here is the silver lining : its a great time to buy used mercedes/bmw. yuck.

12   Norbecker   ignore (0)   2011 Jun 29, 4:01am     ↓ dislike (0)   quote   flag        

PockyClipsNow says

One I looked at they paid 1.8 in 06 with like 5% down payment - and pulled out 750k in 07 then default. That 750k never has to be paid back, is not taxed, and no creditors will hound them, no bankruptcy is needed, they dont have to hide assets or anything. ITS CRAZY, all the rules are thrown out!

750K tax free. Just like winning the lottery! Now I really feel like a financial jackass. Why didn't I do that. Why didn't I stop paying my mortgage, have a wad of cash and live for free for years.

Why would anyone continue to pay their mortgage when their friends and neighbors hit the jackpot and get away with it. This is the ultimate white collar crime.

13   PockyClipsNow   ignore (0)   2011 Jun 29, 4:33am     ↓ dislike (3)   quote   flag        

Its actually BETTER than a lotto win- tax wise.

You pay the highest state+federal tax rates on a lotto hit. So you only get 55% or so of the 1m dollar lotto win.

If you won 1m in the lottery you would keep only about 550k.

You would have to win about 1.5 million in the lotto to take home 750k.

14   twd000   ignore (0)   2011 Jun 29, 4:48am     ↓ dislike (0)   quote   flag        

If I'm reading the IRS website correctly, canceled debt from a NON-RECOURSE loan is NOT taxable, regardless of whether this law is extended

"Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
...

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences."

15   ch_tah   ignore (0)   2011 Jun 29, 4:56am     ↓ dislike (0)   quote   flag        

PockyClipsNow says

One I looked at they paid 1.8 in 06 with like 5% down payment - and pulled out 750k in 07 then default. That 750k never has to be paid back, is not taxed, and no creditors will hound them, no bankruptcy is needed, they dont have to hide assets or anything. ITS CRAZY, all the rules are thrown out!

Are you sure this is true? If what you are talking about is them taking out a HELOC, that is usually a recourse loan, and they do owe it back and creditors can come after them.

16   EBGuy   ignore (1)   2011 Jun 29, 4:58am     ↓ dislike (1)   quote   flag        

As everyone knows, I've been flogging this meme for awhile. The Mayans got something right; the great reset will happen at the end of 2012. And the best thing about the PCN plan, no commission paid to used home salesperson -- priceless.

17   chip_designer   ignore (1)   2011 Jun 29, 4:59am     ↓ dislike (0)   quote   flag        

shrekgrinch says

WTF?

why do you always say WTF

18   EightBall   ignore (1)   2011 Jun 29, 5:05am     ↓ dislike (1)   quote   flag        

Perhaps I'm reading this wrong but doesn't this mean you can only be forgiven for purchase/improvement money and ATM machine money not apply?

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

19   EightBall   ignore (1)   2011 Jun 29, 5:09am     ↓ dislike (0)   quote   flag        

Also, there is no guarantee that the bank will forgive the debt - especially if you live in a state that allows garnishments and other "fun" things. In some states, judgments can be renewed pretty much forever whereas other states the lender only has 10 years to collect or they are SOL.

20   klarek   ignore (3)   2011 Jun 29, 5:51am     ↓ dislike (0)   quote   flag        

EMan says

bubblesitter says

I bet congress is going to extend it beyond 2012.

unlikely, lately they’ve been fighting day and night to keep people in debt.

You're right. The responsible thing for our legislators to do is make it even easier for people to walk away. The last financial melt down sure was a blast. Maybe we can have a $10T TARP this time!

21   klarek   ignore (3)   2011 Jun 29, 5:52am     ↓ dislike (0)   quote   flag        

ch_tah says

Are you sure this is true? If what you are talking about is them taking out a HELOC, that is usually a recourse loan, and they do owe it back and creditors can come after them.

This rarely ever happens. They're using most of their resources just to process these deadbeats. Finding out which mattress they stuffed the cash into would be nigh-impossible.

22   corntrollio   ignore (1)   2011 Jun 29, 7:13am     ↓ dislike (1)   quote   flag        

PockyClipsNow says

Yes we still have debtors prison, Wesley Snipes owed the IRS $ and he is in jail.

That's not debtor's prison. Wesley Snipes willfully and criminally didn't pay his taxes. That's not the same as failing to repay a debt.

bubblesitter says

I bet congress is going to extend it beyond 2012.

Unfortunately, I agree with bubblesitter. Congress is exactly this stupid.

ch_tah says

Are you sure this is true? If what you are talking about is them taking out a HELOC, that is usually a recourse loan, and they do owe it back and creditors can come after them.

In addition, it wouldn't qualify for this exemption. If this was not purchase money, not a refi of purchase money, or was not plowed back into the house, then it doesn't qualify for this exemption. Read what EightBall said.

But note that it's rare that the banksters go after people for deficiency judgments in this climate.

23   PockyClipsNow   ignore (0)   2011 Jun 29, 7:43am     ↓ dislike (0)   quote   flag        

OK so this only applies to a Home Equity Loan IF that loan was used to improve the property AND there is a 2m cap. (I wonder if the total forgiveness cap is 4m for a married couple filing jointly?)

Lets remember the HELOC money that was used to buy a mercedes/plastic surgery ALSO is not supposed to be a tax write off unless spent to upgrade the home....haha... I'm pretty sure everyone writes off that HELOC intrest and doesnt deduct the value of the mercedes from the write off total. Am I wrong?

Anyone here a tax accountant?

This link trys to explain more than the irs site:
http://taxes.about.com/od/income/ss/mortgage_cancel_3.htm

24   kronicade   ignore (0)   2011 Jul 1, 3:41am     ↓ dislike (0)   quote   flag        

Wow, lots of lost people are clueless here.

First, non-recourse or recourse loans DO NOT change how the IRS taxes an individual for "forgiven debt" or "capital losses". The IRS is Federal whereas recourse and non-recourse laws are State.

After a foreclosure or short sale the lender will issue a tax form that indicates the total amount forgiven debt.

READ the IRS link:
http://www.irs.gov/individuals/article/0,,id=179414,00.html

It might make sense for people to walk today to insure foreclosure by December 31st, 2012. Relying on a renewal is gambling.

25   corntrollio   ignore (1)   2011 Jul 1, 4:01am     ↓ dislike (0)   quote   flag        

kronicade says

Wow, lots of lost people are clueless here.

First, non-recourse or recourse loans DO NOT change how the IRS taxes an individual for “forgiven debt” or “capital losses”. The IRS is Federal whereas recourse and non-recourse laws are State.

READ the IRS link:
http://www.irs.gov/individuals/article/0,,id=179414,00.html

Did you even read your own link?

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

State laws can certainly affect federal tax consequences. For example, it matters whether you're in a community property state or a separate property state. The IRS has Publication 555 regarding this issue:

http://www.irs.gov/pub/irs-pdf/p555.pdf

26   kronicade   ignore (0)   2011 Jul 1, 4:21am     ↓ dislike (1)   quote   flag        

Yeah, I wrote that first part all wrong. What I meant to say is that the State determines recourse vs. non-recourse loans.

The IRS only taxes (or doesn't tax) based on what the State determines.

People (above) were writing like the IRS is changing whether or not a loan can be recourse non-recourse.

27   PockyClipsNow   ignore (0)   2011 Jul 1, 4:24am     ↓ dislike (0)   quote   flag        

I'm sure some people will try to sue thier banks to FORCE them to foreclose by 12/31/12.

This seems like a poor way to run things.

28   bubblesitter   ignore (0)   2011 Jul 1, 6:04am     ↓ dislike (0)   quote   flag        

PockyClipsNow says

I’m sure some people will try to sue thier banks to FORCE them to foreclose by 12/31/12.
This seems like a poor way to run things.

LOL.


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