Thread: Real Problems or Not

In recent years, many homes were bought with nothing-down or
little-down mortgages. Since then, home values have dropped in
some areas. If you are in that situation, with little or no equity
in your home, you may be tempted to walk away from the debt.

In a word, don't. Cancellation or forgiveness of debt by a lender
might generate taxable income.

Suppose, for example, you bought a home for $250,000, using a
no-down-payment mortgage loan. Say you are personally liable for
the mortgage.

Currently, the loan balance is $240,000 but the home is worth only
$200,000. If you default, the lender may cancel the debt and sell
the home for $200,000.

In this scenario, you will pick up taxable income of $40,000: the
amount by which the outstanding debt ($240,000) exceeds the property's
market value ($200,000). You likely will be much better off if you
can keep making mortgage payments, waiting for a comeback in the
housing market.

swsop