Comments on: An Early Holiday Present

By: uncommon sense

uncommon sense — Fri, 26 Sep 2008 15:11:20 +0000

The Patriotic Mortgage Repayment act of 2008 could change all this. Mortgage defaulters should be required to repay 105% of the cancelled debt to the US Treasury.

Sure these deadbeats had problems making loan payments on the full balance, but should have no problem after the balances are reduced by the value of the collateral.

By: Courtney Cooper

Courtney Cooper — Mon, 31 Dec 2007 21:15:30 +0000

Hi Eileen – For the people that really need this type of relief, I am happy for them. There is nothing worse than losing your home and then having that little extra slap in the face at the end of the year come tax time.
Unfortunately, there are also a lot of bad seed that will take advantage of this and slow our market down a bit…
Thanks for the update!

By: Eileen

Eileen — Mon, 24 Dec 2007 16:56:54 +0000

The new tax law was signed into law by President Bush on Friday.

By: Kary L. Krismer

Kary L. Krismer — Mon, 24 Dec 2007 05:04:43 +0000

If the debt is already forgiven, it doesn’t need to be included in the bankruptcy. But you could simply not ask that the debt be forgiven, and then discharge it in a bankruptcy if this new statute doesn’t become final, and that should probably deal with any tax issues.

You can discharge certain IRS income tax debt in a bankruptcy,and there are a number of rules, but generally they have to have been due at least 3 years before the bankruptcy was filed. And no, the withholding portion of payroll tax debt cannot be discharged.

By: Eileen

Eileen — Mon, 24 Dec 2007 01:31:59 +0000

Didn’t know you could discharge IRS debt in a BK. I don’t think you can discharge employer payroll tax debt, though. Can you?
Of course, now it’s a moote point since the tax bill passed and all taxes are forgiven on deficiencies from Short Sales thru 2009

By: Clackamas Real Estate Guy

Clackamas Real Estate Guy — Sun, 23 Dec 2007 23:06:52 +0000

Two ways out.
IRS does have exceptions
-In the even of a bankruptcy discharge, the forgiven dept can be included in the bankruptcy.
-If the seller can prove his liabilities exceed his assets. The seller will have to come up with evidence of this to IRS when taxes are done.

By: Eileen

Eileen — Sun, 23 Dec 2007 17:37:54 +0000

Yes, those cash out refi’s bother me, too. I took one party through a short sale where they’d just pulled 40,000 out and the bank ate it. I don’t know if they ever got a deficiency judgement since they moved sites unknown. They probably learned a great scam in the process.

By: Kary L. Krismer

Kary L. Krismer — Sun, 23 Dec 2007 07:32:43 +0000

One final point. If the short sale occurred because of a refinance, where the owner was upside down because they pulled out money, that would be a bit different than if the short sale occurred because of a purchase money security debt (or the refinance in the same amount of purchase money debt). In the refinance for extra money case, arguably they got unrecognized income earlier, but in the purchase money case the only reason they’d be taxed would be because the loss on the sale of a residence is not recognized as a loss. They never really had unrecognized income.

By: Kary L. Krismer

Kary L. Krismer — Sun, 23 Dec 2007 07:27:00 +0000

Christian wrote: “Unintended consequences? Prepare for a MUCH higher rate of default. The USPS will strain under the weight of all of the keys mailed in with the Alt-A ARM crop this spring. This will speed up the collapse and guarantee that 2008 is truly horrifying.”

You’re really overestimating the intelligence, knowledge and planning that people do.

Back before the sale of residences was largely exempt, a lot of people were in serious tax trouble because of their having rolled over gain from residence to residence (which meant their basis was often far less than their debt.) But almost no one knew or understood that.

Once I even had the privilege of speaking to someone at the IRS that was responsible for drafting a regulation on the effect of a bankruptcy trustee abandoning property. The person writing this regulation was doing so in a way that would result in the tax being less likely to be paid, but didn’t have a clue what they were doing because they didn’t understand the bankruptcy system. This was a professional, probably an attorney with a masters in tax. And they didn’t understand enough to change what they were doing. Do you really think the average homeowner is going to change what they do based on this legislation? Very unlikely.

And if they do change what they do, it will be to try to do a short sale instead of being foreclosed. That’s not a bad thing. As I’ve said in another thread, the banks need to wake up and realize that they need to process some short sales in a better fashion. It’s in their interest just as much, if not more as it’s in the interest of the homeowner.

By: Kary L. Krismer

Kary L. Krismer — Sun, 23 Dec 2007 07:15:30 +0000

You people are really missing two points.

First, the sale of residences is generally exempt from being taxed, so this isn’t that different (although I’m not sure the same dollar limits are involved). But if the property were foreclosed, and the lender bid in the entire debt, the result would be the same. So this largely only applies in short sales (or where the lender bids in less than the debt).

Second, most of these people wouldn’t be taxed under the current law in any event, because they’re probably insolvent (which is an exception to discharge of indebtedness income). This just saves them the difficultly of proving that twice (once to the mortgage creditor who forgives the debt, and the second time to the IRS–which do you think is going to do a better job determining that????).

Not really a big deal. If anything it just saves the IRS some time and makes them more efficient.