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Personal Finances / Buying or Selling a Home

URL:  http://boards.fool.com/i-forgot-to-mention-the-taxable-income-part-there-30532998.aspx

Subject:  Re: Another Underwater Thread Date:  2/8/2013  7:39 PM
Author:  ptheland Number:  124715 of 127777

I forgot to mention the taxable income part. There are other ways to exclude cancellation of debt from taxable income besides just being your home. One of those is insolvency.

If she is insolvent, then she wouldn't have any taxable income even in 2014 and beyond. Total up the fair value of her assets and the actual amount of her liabilities just before the potential foreclosure. Subtract the liabilities from the assets. If that number is negative, then that is how much of the debt cancellation she can exclude from income.

Based on what you've mentioned, I'd guess that the home and furnishings, plus possibly a car are her main assets. We also know there's a mortgage, and she might have some other debts. I think it's pretty likely that she's insolvent and will still be able to exclude most or all of the debt cancellation from her taxable income even after the home exclusion expires.

--Peter
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