Monday, September 11, 2006

Forgiveness of Debt is a Taxable Event- Whether you like it or Not :(

A fact that not many people realize, even tax professionals and attorneys, is that paying off a mortgage at time of sale is a taxable event. The IRS considers it "forgiveness of debt".

Many people think that because they owe 200K on a 500K sale, their gain is only 300K. But, if they bought the home for 100K, their gain is 400K and this is the amount that capital gains tax is due on.

They usually say, "but I don't own the mortgage, the bank does". True, but you have had use of this money and the gain it acquired along the way.

If you have borrowed against the property with a second mortgage, or line of credit, you may have what's called a mortgage over basis problem. This is when you owe more on the home than what you paid for it.

What this means is that a TIC or a PAT might not work for you, as you have too much debt and not enough equity.

This is another reason to carefully plan an exit strategy when investing in real estate.

Paula Straub
askpaula@savegainstax.com

http://www.paula-straub-capital-gains-tax-site.com


p.s. My Qualification Questionnaire is functioning again. I didn't realize it was broken (and no one can seem to figure out how it got that way), but a new version is up and running at http://www.savegainstax.com