Will I have to pay income tax on the forgiven amount if a second HELOC loan is negotiated to a settlement?? It is not a purchase money second...

Asked by Paul F, San Jose, CA Wed Dec 9, 2009

I am in the process of trying a loan mod on a second loan. I might be able to "settle" the second loan by paying back a fraction of the total amount. However, I do not know if this is like a short sale situation or not when It comes to taxes. The first loan will still be intact.

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Roswell Moore…, Mortgage Broker Or Lender, Scottsdale, AZ
Mon Jan 25, 2010
The short answer - ask your CPA to eliminate any misunderstandings.
0 votes
Lucy Liou, Agent, Danville, CA
Mon Jan 25, 2010
YOu can also call IRS directly at 1-800-829-1040 during 7am to 10pm . They are very helpful. You will get your question answer immediately .
Web Reference:  http://LUCYLIOUHOMES.COM
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Bob and Debb…, Agent, Danville, CA
Mon Jan 25, 2010
Hi Paul,
I would be very interested in hearing how this turned out for you. Being as it is not pruchase money I'm fairly certain that you will be issued a 1099 for the difference. It will be up to your CPA to 'Find' the bast way to mitigate whatever tax burden you may have as a reslut.
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Christian Y, , Los Angeles, CA
Sun Jan 24, 2010
Paul, please update us with your case. What did you find out from bank, your attorney, CPA or whoever? Did you settle? Any good or bad news? Did you stay in the house?
This is for everybody to learn about your case and help clients..
0 votes
Terri Vellios, Agent, Campbell, CA
Fri Dec 11, 2009
First off only your tax consultant will be able to determine your individual tax situation. Real Estate Professionals may not give tax or legal advice - so I strongly encourage you to discuss this with your tax adviser.

When/if you settle on a loan modification or short sale the bank will be providing you documents to sign. In those documents there may be recourse or non-recourse language, meaning they can lien you for the forgiven amount. If they agree to not come after you then I would see that as a forgiven amount. If they reserve that then it would look like a gray area that the debt was not forgiven or is reserved. Also your credit score will be affected when and how it is reported.

The laws and government aid is changing almost daily on this so what you find out today may be another story when you are done with your transaction. Again, check with your tax adviser.

Here is another link to review: https://www.hmpadmin.com/portal/index.html
Web Reference:  http://www.terrivellios.com
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Bart Marchio…, Agent, Mountain View, CA
Wed Dec 9, 2009
Hi Paul,

Rosie is correct - you may not owe taxes on the debt forgiven if you qualify under the Mortgage Forgiveness Debt Relief Act. You can read more about the Act on the IRS Website: http://www.irs.gov/individuals/article/0,,id=179414,00.html

However this is definitely a question you should ask your CPA, as Realtors we cannot give specific tax advice.

Good luck!

Best regards,

Bart Marchioni
Certified Foreclosure & Short Sale Specialist
(408) 266-3100 Direct
0 votes
Rosie, , 95020
Wed Dec 9, 2009
Hi Paul,
The Mortgage Forgiveness Debt Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principle residence. This includes mortgage restructuring as well as debt forgiven in a foreclosure. Since this is a loan not used in aquiring a residence, you must consult with a tax professional for advise on federal and state tax law in regards to your case.


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