How are second mortgages handled for cancellation of debt?

August 12, 2011

From:  Mark
Date:  24 Oct 2008
Subject:  short sales for 2nd mortgages

I'm a newsletter subscriber... good work!

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?

Thanks

Mark

Answer

Date:  5 Nov 2008

Hello Mark,

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.

Good luck!
Mike Gray

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