Monday, March 30, 2015
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 [email protected].

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

.

Solano News

Easter activities, events abundant

By Susan Hiland | From Page: A1 | Gallery

 
Christians begin Holy Week with Palm Sunday celebrations

By Amy Maginnis-Honey | From Page: A1 | Gallery

2 drivers killed in same area, an hour apart

By Amy Maginnis-Honey | From Page: A1

 
My guide to dining out

By Tony Wade | From Page: A2

Local governments post week’s meeting times

By Susan Hiland | From Page: A3

 
Top young spellers to compete for Solano title

By Glen Faison | From Page: A3

Police investigate shooting off North Texas Street

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

 
Vallejo police seek leads in weekend homicide

By Amy Maginnis-Honey | From Page: A3

Biz Buzz: Re/Max hires new Realtor

By Susan Hiland | From Page: A10

 
Biz Buzz: PAL receives donation from glass company

By Susan Hiland | From Page: A10 | Gallery

 
Biz Buzz: Wiseman officer names Perez to key post

By Kevin W. Green | From Page: A10

.

US / World

Police ramp up rail-crossing citations after recent crashes

By The Associated Press | From Page: A1

 
Analysis finds unequal pay for women on California Capitol

By The Associated Press | From Page: A3

Songwriter injured in California crash; motorcyclist killed

By The Associated Press | From Page: A3

 
Taylor Swift wins artist of the year at iHeartRadio Awards

By The Associated Press | From Page: A4

Drownings along Rio Grande spike after enforcement surge

By The Associated Press | From Page: A5

 
Grandma is a centerfold: Rest home bares all for calendar

By The Associated Press | From Page: A5

Police: 2 bodies found in NYC building explosion rubble

By The Associated Press | From Page: A5

 
Islamic State group beheads 8 Shiites in Syria’s Hama

By The Associated Press | From Page: A7

Waving fronds around the world, Christians mark Palm Sunday

By The Associated Press | From Page: A7

 
Air Canada plane makes hard landing short of Halifax runway

By The Associated Press | From Page: A7

Small tsunami generated in Pacific after earthquake

By The Associated Press | From Page: A9

 
.

Living

Community Calendar: March 30, 2015

By Susan Hiland | From Page: A2

 
Today in History: March 30, 2015

By The Associated Press | From Page: A2

Horoscopes: March 30, 2015

By Holiday Mathis | From Page: B6

 
Parenting: If a father is abusive, a mother must act

By The Washington Post | From Page: B8

 
Horoscopes: March 31, 2015

By Holiday Mathis | From Page: B8

.

Entertainment

TVGrid March 30

By Daily Republic Syndicated Content | From Page: A10

 
TVGrid March 31

By Daily Republic Syndicated Content | From Page: A11

Michelle Obama declares ‘Black Girls Rock!’

By The Associated Press | From Page: A11

 
.

Sports

Spartans Final Four-bound after 76-70 OT win over Louisville

By The Associated Press | From Page: B1

 
Duke back in Final Four after 66-52 win over Gonzaga

By The Associated Press | From Page: B1

 
Hamlin wins for 25th time, and fifth time at Martinsville

By The Associated Press | From Page: B2

Jimmy Walker wins hometown Texas Open

By The Associated Press | From Page: B2

 
Oakland OF Josh Reddick won’t be ready for start of season

By The Associated Press | From Page: B2

California Chrome heads to Britain, to race at Royal Ascot

By The Associated Press | From Page: B2

 
Vettel wins Malaysian GP to end Mercedes streak

By The Associated Press | From Page: B2

Joe Gibbs on son: most courageous person I’ve been around

By The Associated Press | From Page: B2

 
Chodounsky defends slalom title at US Alpine Championships

By The Associated Press | From Page: B2

South Carolina earns 1st Final Four berth, beats FSU 80-74

By The Associated Press | From Page: B2

 
Turner says Saturday regional finals highest-rated in decade

By The Associated Press | From Page: B2

Apology for wrong anthem for El Salvador before game in US

By The Associated Press | From Page: B2

 
Montoya holds off Power to give Penske 1-2 sweep at St. Pete

By The Associated Press | From Page: B2

Stanford’s Randle chases school scoring record, title at NIT

By The Associated Press | From Page: B2

 
Hamlin wins for 25th time, and fifth time at Martinsville

By The Associated Press | From Page: B2

Cain goes 4 innings in Giants win over LA

By The Associated Press | From Page: B3

 
Graveman pitches into 7th inning as A’s beat Brewers 7-0

By The Associated Press | From Page: B3

.

Business

.

Obituaries

Robert Roberts

By Nancy Green | From Page: A4

 
Janice Jewel Thompson

By Nancy Green | From Page: A4

.

Comics

Peanuts March 30

By Daily Republic Syndicated Content | From Page: B5

 
Zits March 30

By Daily Republic Syndicated Content | From Page: B5

Blondie March 30

By Daily Republic Syndicated Content | From Page: B5

 
Pickles March 30

By Daily Republic Syndicated Content | From Page: B5

Get Fuzzy March 30

By Daily Republic Syndicated Content | From Page: B5

 
Sally Forth March 30

By Daily Republic Syndicated Content | From Page: B5

For Better or Worse March 30

By Daily Republic Syndicated Content | From Page: B5

 
Baldo March 30

By Daily Republic Syndicated Content | From Page: B5

Garfield March 30

By Daily Republic Syndicated Content | From Page: B5

 
Dilbert March 30

By Daily Republic Syndicated Content | From Page: B5

Baby Blues March 30

By Daily Republic Syndicated Content | From Page: B5

 
Frank and Ernest March 30

By Daily Republic Syndicated Content | From Page: B5

B.C. March 30

By Daily Republic Syndicated Content | From Page: B5

 
Wizard of Id March 30

By Daily Republic Syndicated Content | From Page: B5

Beetle Bailey March 30

By Daily Republic Syndicated Content | From Page: B5

 
Rose is Rose March 30

By Daily Republic Syndicated Content | From Page: B5

Sudoku March 30

By Daily Republic Syndicated Content | From Page: B6

 
Bridge March 30

By Daily Republic Syndicated Content | From Page: B6

Word Sleuth March 30

By Daily Republic Syndicated Content | From Page: B6

 
Crossword March 30

By Daily Republic Syndicated Content | From Page: B6

Cryptoquote March 30

By Daily Republic Syndicated Content | From Page: B6

 
B.C. March 31

By Daily Republic Syndicated Content | From Page: B7

Blondie March 31

By Daily Republic Syndicated Content | From Page: B7

 
Peanuts March 31

By Daily Republic Syndicated Content | From Page: B7

Baldo March 31

By Daily Republic Syndicated Content | From Page: B7

 
Rose is Rose March 31

By Daily Republic Syndicated Content | From Page: B7

Beetle Bailey March 31

By Daily Republic Syndicated Content | From Page: B7

 
For Better or Worse March 31

By Daily Republic Syndicated Content | From Page: B7

Dilbert March 31

By Daily Republic Syndicated Content | From Page: B7

 
Garfield March 31

By Daily Republic Syndicated Content | From Page: B7

Pickles March 31

By Daily Republic Syndicated Content | From Page: B7

 
Zits March 31

By Daily Republic Syndicated Content | From Page: B7

Sally Forth March 31

By Daily Republic Syndicated Content | From Page: B7

 
Get Fuzzy March 31

By Daily Republic Syndicated Content | From Page: B7

Wizard of Id March 31

By Daily Republic Syndicated Content | From Page: B7

 
Baby Blues March 31

By Daily Republic Syndicated Content | From Page: B7

Frank and Ernest March 31

By Daily Republic Syndicated Content | From Page: B7

 
Word Sleuth March 31

By Daily Republic Syndicated Content | From Page: B8

Bridge March 31

By Daily Republic Syndicated Content | From Page: B8

 
Sudoku March 31

By Daily Republic Syndicated Content | From Page: B8

Cryptoquote March 31

By Daily Republic Syndicated Content | From Page: B8

 
Crossword March 31

By Daily Republic Syndicated Content | From Page: B8