Bankruptcy and Second Mortgage Debt on a Vacation Home

Second mortgage debt on a vacation home or rental property can be a tricky situation for debtors.  If your vacation home or rental property gets foreclosed, your second mortgage holder can file a 1099c with the IRS and the debt will be counted as income.  For some people, this could result in a huge tax bill.  However, if you file bankruptcy before the property is foreclosed, you cannot be taxed in a 1099c situation.

I’ve met with clients from Dallas, Douglasville, Hiram, Cartersville, Calhoun, Rome and Dalton who have had vacation homes or rental properties that they need to unload.  Many of these bankruptcy clients bought these homes thinking that they could always sell them if their income ever dropped.  Unfortunately, with the national meltdown in real estate prices, selling the property has become impossible in many situations.

Lets say you own a vacation condo in Florida with $300,000.00 owed on the first mortgage and $100,000.00 owed on the second mortgage.  Lets assume the house is sold at foreclosure for $300,000.00.  When your second mortgage company files the 1099(c) with the IRS, you will be tax on the full $100,000.00 as income.  This can make your tax bill to the IRS go through the roof.  However, if you file for bankruptcy before the foreclosure takes place, this event will not be taxable.  If you sit around and wait to file bankruptcy after the 1099(c) has already been filed, you may end up with tax debt that cannot be eliminated in your bankruptcy.

It is extremely important for owners of second homes to understand that the Mortgage Forgiveness Debt Relief Act and Debt Cancellation applies only to your principal residence.  The IRS states, “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on the principal residence.  Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”

Any person who is facing foreclosure should take advantage of a free consultation with a bankruptcy attorney and explore all options and consequences of the foreclosure of their property.

Related Posts:

1.  Bankruptcy and the taxation of foreclosure by the IRS

2.  Can I Wipe Out My Second Mortgage in a Chapter 13?

3.  When Will My House be foreclosed in Georgia?

4.  Should I file bankruptcy if I’m  letting the house get foreclosed?

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