How are second mortgages handled for cancellation of debt?
August 12, 2011
Date: 24 Oct 2008
Subject: short sales for 2nd mortgages
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I was reviewing an article you wrote in July of 2008 regarding the taxation of short sales vs foreclosures and recourse vs nonrecourse debt.
How are 2nd mortgages handled for the exclusion for cancellation of debt relating to a principal residence?
Date: 5 Nov 2008
They are analyzed the same way as a first mortgage. Whether the mortgage is a recourse debt is a question to be resolved under state law. As I understand it, in California any mortgage used to purchase a principal residence is nonrecourse. See your attorney.
If the second mortgage was "acquisition indebtedness" incurred for the purchase or improvement of the residence or to refinance a previous "acquisition indebtedness," it should also qualify for exclusion subject to the limitations explained in my article.
We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.
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