House repo and taxes?
House repo and taxes?
I had my home repo'ed and had heard that I have to pay taxes
on the remaining amount owed. Is this right? It was a VA
loan so the loan WAS paid.
Any help out there?
-Yes, relief of indebtedness represents taxable income to the
debtor, except when it occurs via a bankruptcy proceeding.
However, you say that the loan was paid off, so why was
there a reposession?
-You don't give enough here for me to say so. Ordinarily,
debt forgiveness by a financial institution is considered
cancellation of debt income and could be taxable to you.
However, there are exceptions for insolvency. The
insolvency exception isn't absolute and can be partial.
Also, since the house was VA home VA may have paid the
lender, but if the VA was left hanging you could still have
cancellation of debt income. There is an exception to this
if the VA loan was forgiven under very strict guidelines.
If you can give us more details about the repossession and
the settlement of the debt, maybe we can help.
-First, if you have a nonrecourse loan (lender can only take
the property in satisfaction of the debt), then you have a
sale of the house to the lender for the balance of the note.
If there was a gain on that transaction (amount of debt was
greater than your basis in the home), then there could be a
taxable gain. However, remember that Section 121 (exclusion
for gain on sale of a home) would likely apply so long as
you qualified under that section.
Now, if you have a recourse loan (where the lender could
come after you for any amounts remaining unpaid after giving
credit for the value of the home), then there can be two
different transactions. First, to the extent of the fair
market value of the home on the date of repossession, you
would have a sale of the home like the above. But if there
still remained an unpaid balance that the lender could
collect from you after that point, we now have an unsecured
debt. If you obtain relief from that debt (the lender
simply foregives it rather than pursuing collection), that
amount would be ordinary income to you. However, Section
108 might offer some relief if you were in bankruptcy or
were insolvent.
Because of the complexities in this area, I would strongly
suggest seeking paid, competent, local professional advice
on the transaction. The only real way to determine what
applies is to look at the actual details of the transaction
and usenet is not a place that can be done.