Is interest deductible for my equity loan?

August 25, 2008

From:  Jennifer
Date:  Tue, 29 Jan 2008

I bought a condo in San Jose in July, 2007. Financially, things happened and the condo is now in pre-foreclosure/short sale and I’m now back home with my parents. If the home is sold, it will be for a lot less than I bought it for.

With a short sale, I’m assuming I will probably receive a 1099 and have to pay taxes on the difference lost? I don’t think I will qualify for the Mortgage Forgiveness Debt Relief Act of 2007. With that law, I think you have to have lived in the home for at least 24 months.

Answer

Date:  04 Feb 2008

Hello Jennifer,

I just posted an update on my article on short sales and foreclosures to cover the new Act, "Tax Consequences of a 'Short Sale' of Real Estate vs. Foreclosure". (Remember California and many other states haven’t conformed to the new law yet.) You don’t have to have lived in the home for at least 24 months. Many of the people who are in foreclosure bought their homes recently. (But July, 2007? What were you thinking?)

However, the new Act wasn’t designed for your situation. Since your mortgage was originated for the purchase of a residence in California, it is probably a non-recourse loan. This means you will be treated as selling the residence for whatever you get for it plus the debt forgiveness, which should result in a non-deductible loss, not income.

You might not be able to afford it, but you should go to a tax professional for help. Maybe Mom and Dad will help out with the fees.

Good luck!
Mike Gray

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