Wednesday, November 26, 2014
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

IRS reverses opinion on ‘debt forgiveness tax’

By
From page HSR3 | June 14, 2014 |

Throughout the more-years-than-I-want-to-count history of this column, I have very occasionally broken from the question-and-answer format to pass on some breaking news that I think is relevant to the readers.

This is one of those columns.

The housing mess we’ve gone through from early 2007 until just recently, and perhaps currently depending upon your perspective, has taught us all a lot of things.

Among them is, “Yes Fred, you can lose money in California real estate.” Not to mention, “No, son, owning your own home is not everyone’s idea of the American dream.”

All of us, myself included, got seriously schooled on liability issues to mortgage holders, foreclosure procedures, and the fact that meaningful loan modifications are mostly a fairy tale.

However, there is one serious issue for millions of Americans, and most particularly Californians, that has been left unresolved. That would be taxes.

There are two types of taxes that could be leveled at anyone who no longer owns real estate, regardless of how they came to not own it anymore. Foreclosure, short sale, “regular sale,” etc., it doesn’t matter.

The first is capital gains tax.

No real mystery there. Theoretically it’s a tax on the profit you made from your investment. A relatively low tax, but a tax nonetheless. Those as cynical as I will tell you it was devised so rich people could pay taxes at the poor peoples’ tax rate. But that’s for someone else’s column.

However, the tax is what it is and your accountant can tell you if you owe any.

The other type is something most consumers have never had to deal with. Often called debt forgiveness tax, the proper name is cancellation of debt income tax. It goes like this:

If I’m a commercial lender and I lend you $10, and later “forgive” that 10 buck obligation, I have to send you a 1099 and you add it to whatever 1099s and W2s you have and pay income tax on the total.

The tax has been around forever, but mostly affected businesses who restructured their business loans. Consumers seldom had to deal with it, at least not in large figures.

Perhaps it makes sense.

In my $10 example, you got 10 bucks. It may not have been salary, but you got it so perhaps you should pay income tax.

Fast forward to 2007. The housing market has tipped across the country. Home values are going down fast. To make it worse, huge numbers of homebuyers in 2004 and 2005 bought their homes with no money down, meaning they had zero equity the day they moved in. Then the value dropped.

As the economy faltered, people began to have their incomes cut, or eliminated altogether. Additionally, many of the crazy loans out there became due and payable. Homeowners had negative equity and couldn’t refinance. Foreclosures started across the country and only accelerated over the next five years.

So, in a nutshell, banks would foreclose on a house, lose hundreds of thousands of dollars they would write off, and then send the ex-homeowner a 1099.

The result was that the borrower would have to add those hundreds of thousands of dollars they never saw to their income and pay taxes on it. Not only that, but the added phantom money took their tax bracket right up to the top, so they paid more taxes on the money they had earned as well.

In response, President George W. Bush signed a temporary amnesty for those who lost their primary residence. That was renewed for a few years but expired long ago.

So now we come to California.

There has long been an exception to this tax for California homebuyers who bought a property that they intended to live in. The exception, known as the “purchase money” exception, only applies to the original loan(s) that was used to purchase the property.

In the event of a default, the homeowner is never personally liable to the bank, which means the bank lacks the capacity to sue to collect, which means they can’t “forgive,” which means it’s not taxable.

You lose that protection if you refinance or acquire a second mortgage after you own the property.

In 2011, a law went into effect that appeared to accomplish the same thing for any mortgages that were on a home when it was short sold.

California Code of Civil Procedure Section 580(e) says in effect that if a bank agrees to a short sale, the loan becomes nonrecourse, meaning the bank can’t sue.

Remember this is a state law, so we were left guessing how the IRS would look at it.

Due to the uncertainly, U.S. Sen. Nancy Pelosi sent a letter to the IRS asking how they were going to treat the written-off debt from a California short sale.

We all cheered when the IRS returned an opinion letter last fall expressly stating that a short sale in California was not subject to debt forgiveness tax. We cheered right up until two weeks ago.

The IRS sent a second letter late last month to “explain” the first letter, effectively reversing everything the first letter said. Specifically, that regardless of Section 580(e), it was considered canceled or forgiven debt and was therefore taxable unless it was purchase money.

Now, the law says nobody is supposed to rely on IRS opinion letters, which makes this attorney wonder why they issue them in the first place.

So the answer to the question, “Do I have to pay debt forgiveness tax on my nonpurchase money loan if I short sold in the last couple of years?” is totally up in the air. As you can imagine, the answer will affect millions of people.

Write your congressman, senator, city councilman, clergyman, town dog catcher, whoever, and raise a stink. No tax regulation with the ability to do so much damage to those who have already suffered should have to be interpreted by a flip of the coin.

Tim Jones is a real estate attorney in Fairfield. If you have a real estate questions you would like to have answered in this column you can contact him at SolanoScene@TJones-Law.com.

LEAVE A COMMENT

Discussion | No comments

The Daily Republic does not necessarily condone the comments here, nor does it review every post. Read our full policy

  • Recent Articles

  • Enter your email address to subscribe and receive notifications of new posts by email.

  • .

    Solano News

     
    Groups distribute Thanksgiving food

    By Ryan McCarthy | From Page: A1, 3 Comments | Gallery

     
     
    County fair proposal, budget topics of scrutiny

    By Amy Maginnis-Honey | From Page: A3 | Gallery

    Police: Vehicle burglaries not new for Fairfield

    By Susan Hiland | From Page: A3

     
    Library schedules soap-making program

    By Glen Faison | From Page: A4

     
    Vacaville PD seeks VIPS program volunteers

    By Glen Faison | From Page: A4

     
    Fairfield police offer free gun locks

    By Ian Thompson | From Page: A4, 1 Comment

     
    Fairfield police investigate shooting

    By Susan Hiland | From Page: A4

     
    Science comes to libraries – for all to see

    By Glen Faison | From Page: A5

    Soroptimists seek award applicants

    By Glen Faison | From Page: A5

     
     
    Nichols plans free family concert in Napa

    By Glen Faison | From Page: A7

    Church’s holiday soiree on Vacaville calendar

    By Glen Faison | From Page: A7

     
    Suisun City police log: Nov. 24, 2014

    By Susan Hiland | From Page: A9

     
    Fairfield police log: Nov. 23, 2014

    By Glen Faison | From Page: A9

    Fairfield police log: Nov. 22, 2014

    By Glen Faison | From Page: A9

     
    Suisun City police log: Nov. 23, 2014

    By Glen Faison | From Page: A9, 1 Comment

    Suisun City police log: Nov. 22, 2014

    By Glen Faison | From Page: A9

     
    Weather for Nov. 26, 2014

    By Daily Republic | From Page: B12

    .

    US / World

     
    Anger at Ferguson case based on emotion, evidence

    By The Associated Press | From Page: A1, 3 Comments

    Tough to make a case against police in shootings

    By The Associated Press | From Page: A1

     
    Protesters return to riot-scarred Ferguson streets

    By The Associated Press | From Page: A1

    In Seattle, tofu turkeys get Thanksgiving pardons

    By The Associated Press | From Page: A2, 1 Comment

     
    Los Angeles freeway sign unveiled with typo

    By The Associated Press | From Page: A2

    Heirloom ring flushed; sewer workers retrieve it

    By The Associated Press | From Page: A2

     
    Ohio family recovers missing Sasquatch statue

    By The Associated Press | From Page: A2

    Auction fetches $28K for 1st batch of new bourbon

    By The Associated Press | From Page: A2

     
    Agreement: LA jails to improve wheelchair access

    By The Associated Press | From Page: A5

    Window washer fights for life after 11-story fall

    By The Associated Press | From Page: A5

     
    Oakland police arrest more than 40 protesters

    By The Associated Press | From Page: A6

    Lawmakers target Golden Gate Bridge sidewalk fee

    By The Associated Press | From Page: A6, 1 Comment

     
    Cosby philanthropy shadowed by sexual allegations

    By The Associated Press | From Page: A6

    Arkansas, Mississippi gay marriage bans overturned

    By The Associated Press | From Page: A10, 1 Comment

     
    Calorie count to appear with many prepared foods

    By The Associated Press | From Page: A10

    8 shoes of Holocaust victims stolen in Poland

    By The Associated Press | From Page: A11

     
    Activists: Syrian strikes kill 60 in IS-held city

    By The Associated Press | From Page: A11

    AP sources: Top candidate for defense job bows out

    By The Associated Press | From Page: A11, 2 Comments

     
    WWII Museum opening new pavilion in New Orleans

    By The Associated Press | From Page: A11

    Police: Students ran high school prostitution ring

    By The Associated Press | From Page: A11

     
    Wet basements in Buffalo as flooding fears ease

    By The Associated Press | From Page: A11

    Soldiers to spend Thanksgiving in Ebola isolation

    By The Associated Press | From Page: A11

     
    2 teen female bombers kill more than 40 in Nigeria

    By The Associated Press | From Page: A11

    Official: Afghan president orders military review

    By The Associated Press | From Page: A12

     
    .

    Opinion

     
    Senate staff cuts reduce transparency

    By Dan Walters | From Page: A8

     
    Hagel: The fall guy

    By David Rothkopf | From Page: A8

    .

    Living

    Community Calendar: Nov. 25, 2014

    By Susan Hiland | From Page: A2

     
    Community Calendar: Nov. 26, 2014

    By Susan Hiland | From Page: A2

    Today in History: Nov. 26, 2014

    By The Associated Press | From Page: A2

     
    Horoscope for Nov. 26, 2014

    By Holiday Mathis | From Page: B5

    The man I’m seeing makes no effort to get to know my kids

    By Kathy Mitchell and Marcy Sugar | From Page: B5

     
    A do-ahead cornmeal biscuit to sop up your gravy

    By The Associated Press | From Page: B6

     
    Fresh take on an herb-roasted Thanksgiving turkey

    By The Associated Press | From Page: B6

    Turn turkey leftovers into a healthy dinner salad

    By The Associated Press | From Page: B6

     
    .

    Entertainment

    TVGrid

    By Daily Republic Syndicated Content | From Page: A7

     
    ‘Birdman’ leads Spirit Awards nominations

    By The Associated Press | From Page: A7

    .

    Sports

    Red Sox bring in Sandoval, Hanley Ramirez

    By The Associated Press | From Page: B1 | Gallery

     
    Vacaville Christian wins 3-0, advances to state quarterfinals

    By Marcus Lomtong | From Page: B1 | Gallery

    Curry powers Warriors past Heat 114-97

    By The Associated Press | From Page: B1

     
    49ers rookies shine in big roles, out of necessity

    By The Associated Press | From Page: B1

    Cousins, Kings beat Pelicans 99-89

    By The Associated Press | From Page: B1 | Gallery

     
    NFL, union discuss personal conduct policy

    By The Associated Press | From Page: B2

    Bama, FSU, Oregon, Miss St keep playoff rankings

    By The Associated Press | From Page: B2

     
    Messi sets European record with 74 goals

    By The Associated Press | From Page: B2

    Judge OKs Hernandez trial delay in 2012 killings

    By The Associated Press | From Page: B2

     
    Kurt Busch wins delay of Delaware court hearing

    By The Associated Press | From Page: B2

    Giants third base coach Tim Flannery retires

    By The Associated Press | From Page: B2

     
    AP source: Left-hander Jon Lester, Giants to meet

    By The Associated Press | From Page: B2

    Pats are unanimous No. 1 in AP Pro32 rankings

    By The Associated Press | From Page: B2

     
    .

    Business

    Rain, snow could mess up Thanksgiving travel

    By The Associated Press | From Page: B7

     
    New iPhones push Apple’s market cap past $700B

    By The Associated Press | From Page: B7

    Twitter lets merchants offer deals to its users

    By The Associated Press | From Page: B7

     
    US economy posts even stronger growth in Q3

    By The Associated Press | From Page: B7

    Thanksgiving travel woes? There’s an app for that

    By The Associated Press | From Page: B7

     
    US home price gains slow for 10th straight month

    By The Associated Press | From Page: B7

    Barbie dethroned by Team Elsa

    By The Associated Press | From Page: B7

     
    .

    Obituaries

    Esther Ringler

    By Nancy Green | From Page: A4

     
    Glenita Reyes McLaughliin

    By Daily Republic | From Page: A4

    Leslie “Esi” Gros

    By Nancy Green | From Page: A4

     
    .

    Comics

    For Better or Worse

    By Daily Republic Syndicated Content | From Page: B4

     
    Beetle Bailey

    By Daily Republic Syndicated Content | From Page: B4

    Baldo

    By Daily Republic Syndicated Content | From Page: B4

     
    Dilbert

    By Daily Republic Syndicated Content | From Page: B4

    Peanuts

    By Daily Republic Syndicated Content | From Page: B4

     
    Baby Blues

    By Daily Republic Syndicated Content | From Page: B4

    Pickles

    By Daily Republic Syndicated Content | From Page: B4

     
    Zits

    By Daily Republic Syndicated Content | From Page: B4

    Sally Forth

    By Daily Republic Syndicated Content | From Page: B4

     
    Rose is Rose

    By Daily Republic Syndicated Content | From Page: B4

    Get Fuzzy

    By Daily Republic Syndicated Content | From Page: B4

     
    Frank and Ernest

    By Daily Republic Syndicated Content | From Page: B4

    B.C.

    By Daily Republic Syndicated Content | From Page: B4

     
    Blondie

    By Daily Republic Syndicated Content | From Page: B4

    Garfield

    By Daily Republic Syndicated Content | From Page: B4

     
    Wizard of Id

    By Daily Republic Syndicated Content | From Page: B4

    Bridge

    By Daily Republic Syndicated Content | From Page: B5

     
    Word Sleuth

    By Daily Republic Syndicated Content | From Page: B5

    Cryptoquote

    By Daily Republic Syndicated Content | From Page: B5

     
    Sudoku

    By Daily Republic Syndicated Content | From Page: B5