Legalities aside, there are also huge tax consequences to consider.
A local attorney and real estate broker posting under the name “davecherr” commented on the problem of debt forgiveness.
There is a massive and thus-far unremarked upon problem with this ED scheme: it would result in a MASSIVE INCOME TAX BILL FOR THE HOMEOWNER. Under the tax code, discharge of indebtedness is counted as income. There is a safe harbor for people who lose their primary residence to foreclosure, but it would not apply to these Richmond residents, since they would keep their house with magically reduced debt.
Read more at http://globaleconomicanalysis.blogspot.com/2013/07/tax-nightmare-of-eminent-domain.html#ITujKY26TipCDmUZ.99
I am a tax preparer. A taxpayer that is insolvent (liabilities > assets) can exclude some or all the cancellation of debt income on their tax return. Very few of the Richmond (CA) homeowners with underwater mortgages that get a 1099-C (cancellation of debt) would have to include this income on their return I’d guess.
Probably not many of these people pay much income tax And sendi g them a bill for the profit from any giveaway writedown program won’t bother them much
If they are t laying their mortgage what makes anyone Imagine they’ll suddenly leap to the opportunity of paying a big IRS bill?