Don’t you face a large tax liability if you walk away from a mortgage?
I am not a tax accountant; some at FR are.
But you are correct-if you walk away from a mortgage, the IRS considers the mortgage amount taxable income.
Don’t think there is a Tax Liability, but there used to be a Deficiency Judgement,(the difference between what is owed and what the banks can sell), at least that is the way it USED TO BE. Maybe all forgiven now, who knows.
It used to be that you were taxed on anything you were forgiven. If you walked with $200,000 left to pay, and the bank could only get $150,000 for the property and they forgave the $50,000, then you were liable for taxes on that $50,000 as income.
However, I heard recently (but have not actually looked it up), that those who had walked away, and had money on a mortgage forgiven, were no longer going to be held liable for taxes as a result of one of the plethora of new laws passed. Again, I haven't looked this up, so I'm not sure of this being true.
Not from the Feds. On the state level, it depends. Most states have passed laws to conform to the federal law. If you lose your home to foreclosure or short sale, and it is you primary home, you probably will not face tax consequences on the forgiven debt.
no they don’t face a tax liability through 2012.
If they do a bankruptcy they face zero liability.
If they do a ch 13 the second mortgage can be stripped off.
REMEMBER FOLKS this is a contract for purchase with the house as collateral. You pay you keep. No pay, bank takes.
People are just making the banks live up to their end of the contract.