The 60 Minutes Walkaway: Conscience and Consequences

Debt forgiveness has long been a taxable event.  But the taxability of purchase money mortgage debt forgiven by a lender was relaxed by the Bush Administration and has been further lessened under Obama.

Yet there are limits, and these should not be a surprise to anyone, including those who appeared over the weekend on 60 Minutes bragging about how they plan to walk away from their homes without remorse - - or even to continue living in their homes without paying their mortgages until lenders physically ousted them, just because they can.

A key exception to tax relief

NO MORE STATE TAX ON FORGIVEN DEBT

From the California Association of Realtors:

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Enacted into law yesterday, Senate Bill 401 generally aligns California's tax treatment of mortgage debt relief income with federal law. For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption

BofA to start reducing mortgage principal - Yahoo! News

Despite the legal motivation, B of A is beginning a very important process.

Quoting from the Yahoo News article, "The bank, the largest mortgage servicer in the country, said Wednesday it will forgive up to 30 percent of some customers' total mortgage balances. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth."

This should put pressure on other lending institutions to follow suit, preventing a slew of foreclosures and short sales. Good news indeed! - David

Years after loan default, homeowners may still owe - Sacramento Bee

Don't let this happen to you:  The downturn forces you to do a short sale, relieving your first mortgage debt.  But the second mortgage isn't officially forgiven, and later comes back to bite you.  Quoting from the Sacramento Bee,

"In many short sales, experienced real estate agents or attorneys can negotiate away debt obligations for the second-lien loan. But many inexperienced borrowers don't know that, and sign final-hour agreements giving lenders the right to pursue them later."

If you're involved in a distress sale from either side of the transaction, an experienced advisor is crucial. - David

IRS tells homeowners how to get tax relief if a lender forgives part of their debt - latimes.com

Here's how to get tax relief if a lender forgives part of your debt.  This is an important point, as debt forgiveness is typically a taxable event (should you be fortunate enough to successfully negotiate a principal reduction or short sale, assuming you're unfortunate enough to need one). 

Early in the housing crisis, the Bush II administration initiated a policy, which remains today, exempting mortgage debt forgiveness from being taxable. - David