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April 30 mgmt127a

April 30 mgmt127a - MGMT 127A Debt Relief Income Tax Free...

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April 30, 2008 MGMT 127A Debt Relief Income Tax Free Under Following Circumstances: -Gift -Bankruptcy -Lowering Payment on Installment Plan (Price Reduction) Foreclosures Cost of Home: $400,000 Mortgage: $320,000 Home value now: $270,000 Balance on Mortgage: $291,000 Bigger debt on the house than they have value in the house House is “under water,” “has negative owner’s equity,” “deficiency” Normal business law says that if I owe someone a note payable and the collateral falls in value, the person I owe the money can take the collateral and can still sue me for the debt. In an occupied house in California, if the house falls in value, the most they lose is the house. This is to protect the homeowner. We didn’t want them to lose everything else they have, losing house was bad enough. This is not the general rule though. Negative owner’s equity in the house: $21,000 ($291-$270)
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The bank forecloses upon the house and under California law must cancel the debt. Normally, loss on personal item cannot be deducted. If house goes down in value, you cannot write anything off. If the bank forecloses, does the person have income? The person gets debut relief by getting out of $291 of debt with only $270 transferred. They get out of $21 of the debt. Did the bank suffer a loss? Yes, the bank’s loss is my gain. Before, this used to be considered income. Law was recently changed, and now debt relief does not need to be reported. Debt relief benefits due to the foreclosure of an owner occupied house do not have to be reported.
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