Banks forgive phantom debt, homeowners face tax consequences
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Do you think banks forgiving the second lien mortgage debt of some homeowners will help these homeowners stay in their homes?
- Yes. (64%, 154 Votes)
- No. (36%, 88 Votes)
Total Voters: 242
Related article:
The program is available by “invitation only.” Invitees are restricted to homeowners who:
- have second mortgage loans held or serviced by BofA; and
- are currently in default on their first or second mortgage.
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loading...About The Author
Carrie B. Reyes
is lead writer in charge of the Real Estate Practice and Due Diligence and Disclosures books.
Latest CommentsLeave a Reply
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FWIW, I disagree with First Tuesday’s take on the following, “The banks must release liens when a debt secured by a home is satisfied. In California, the trust deed must be re-conveyed within 30 days of the satisfaction of the debt..” This statement is untrue. Despite a debt (note) being discharged in BK, the lien still remains. The lienor can subsequently foreclose that lien.
Although both BOA and Chase are extinguishing many of their 2nd liens because of self-serving interests (incentive payments from Treasury), the extinguishments also provide a real service to the debtors.
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“This leaves homeowners vulnerable to tax scuffles with the Internal Revenue Service (IRS) over whether the amount “forgiven” by the bank is taxable income.” This is clearly covered under existing regulations – the “forgiven” debt was previously discharged in bankruptcy. There is no notional income. Period. The taxpayer will need to file a Form 982 to balance out any 1099C the bank issues, but I don’t see this as a “scuffle,” just a simple CYA when filing the taxes. By this time, the IRS is conversant with banks screwing up paperwork.
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I have a client who received the forgiveness letter. They had not paid their mortgage in 4 years (they filed a BK but the first had it released). We are short selling the home, BofA was not going to get more than 8500 anyway but it did speed up the approval letter on the short sale from BofA which has taken almost a year to get. When I called BofA and asked how long the reconveyance would take on the full forgiveness they told me 90 days form the date of the letter so we went with the short sale instead. Interesting to know it shoudl be 30 days.
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