This Spotify Podcast or WordPress Blog Post is in response to inquiries about the tax consequences of Walking away from your Mortgage.
If you have a mortgage from a commercial lender and stop making payments, the lender will begin foreclosure proceedings and either go to court to get a judgment against you or write off the debt. If the lender cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. This amount may be reduced by any proceeds the lender receives from selling your home.
While cancellation of debt is generally taxable, there are certain situations in which it is not. The most common situations when cancellation of debt income is not taxable include:
(1) Bankruptcy: Debts discharged through bankruptcy are not considered taxable income
(2) Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable .to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
(3) Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and, again, the assistance of a tax professional is recommended if you believe you qualify for this exception.
(4) 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.
Note that losses from the sale or foreclosure of personal property are not deductible.
Please call me at your earliest convenience so we can discuss your particular situation and what we might do to mitigate any adverse tax consequences.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04292021 320-580)