CONSIDER INCOME TAX IMPLICATIONS BEFORE ENTERING INTO A SHORT SALE OR FORECLOSURE

Cancelling mortgage debt, either through a short sale, foreclosure, or loan modification, can lead to a painful income tax bill if you don't follow IRS rules.  Usually when a creditor cancels a debt, such as unpaid student loans or credit cards, the amounts forgiven are treated as ordinary taxable income.  You have to declare it as income on your tax returns and pay taxes on it.   Congress passed a law creating an exception covering distressed home mortgages.  But you don't automatically qualify for special tax treatment when a lender writes off part of your mortgage debt.  The cancelled debt must have been used by you "to buy, build or substantially improve your principal residence."  If the debt is not on your principal residence, or if you took out money to use for something else other than the purchase of the home or to substantially improve it, (such as paying off other debts, taking a vacation, buying a car, etc.)  then you won't qualify for the special tax treatment.  You could end up owing a lot of money to the government even after you lost your house.

For a more detailed discussion on this issue, follow the link below for the complete article from the Los Angeles Times.
http://www.latimes.com/business/realestate/la-fi-harney-20110313,0,6669801.story

If you would like more information on this topic or other bankruptcy topics, please contact  our Pasadena office at  888.368.8941 (toll free) or 626.389.8575.  Mr. Phillip Myer will be happy to answer your questions for you.  . If you need assistance regarding a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, bankruptcy litigation, legal debt settlement, mortgage modification, lien stripping, getting rid of the second mortgage on your house, stopping a foreclosure or wage garnishment, asset protection, discharging debt, etc. we can help!  Please contact us to receive a free consultation or visit our website at http://www.phillipmyerlaw.com/  to request an in-person consultation with an experienced bankruptcy attorney in the Pasadena, Glendale, Altadena, Alhambra, Sierra Madre, Los Angeles and San Gabriel Valley areas.