Galt's Gulch

Surprise! Forgiven Debt May Be Taxable Income

Posted by eskslo 12 years ago to Economics
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Yet another surprise you didn't want
SOURCE URL: http://www.cnbc.com/id/100557328

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  • Posted by LionelHutz 12 years ago
    Imagine instead of property, one took out a loan for stock investing. Let's call it $200K.
    Then the stock market crashed, and your portfolio is only worth $110K.
    The bank reviews this situation and says:
    "You could walk away from your loan and release the stocks (collateral) to me at present value, but I find that not so attractive."
    "Let me instead write down your loan to $130K, and you keep paying me on a reduced payment schedule." You are both thinking hopefully the asset recovers a good chunk of its value in the future.

    It would be crazy for the federal government to claim this individual received $70K in "income" from this arrangement.
    Income cannot be assessed until the asset is sold.
    They understand the concept of "capital loss" at sale time.
    If confronted with this situation, the individual would immediately sell those stocks to claim a $90K loss rather than accept $70K of taxable income, and then they would seek bankruptcy protection.

    It works no different in the housing world. When people find out that these writedowns are going to be treated as income, they should immediately do the same thing.

    What's going on here?
    I believe when you repay a bank, the interest portion of your payment counts as 'income' to that bank.
    Income which the bank then pays taxes on.
    All these loan writedowns must be costing the FedGov a SIGNIFICANT amount of money.
    They're looking to recoup lost revenue.
    But notice how they do it. The income they have lost from the bank was typically 5% compounded on principle, spread out over 15-30 years.
    They are coming after you not for lost taxes against 5% compound interest, but for ordinary income taxes against 100% of forgiven principle...in ONE YEAR.

    Matters of capital gain or loss must wait until the asset is SOLD. To count loan forgiveness as ordinary income is just screwed up.

    This is government greed.

    That's the way I see it.
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    • Posted by khalling 12 years ago
      and the federal govt went out of their way to structure TARP and fed reserve bailouts, QEs1-900, so that those businesses did NOT have huge tax liabilities for the bailouts. but the american citizen, who was a victim of the financial crisis, will be in it to the machine, for the rest of their lives.
      But I ask those of you in this site-did you vote for Mitt Romney? Do you comply with the feds coming knocking at your door with "pay up!" spitting from their collective mouths?
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    • Posted by eskslo 12 years ago
      What is absurd, it that most people going into foreclosure (not all I grant you, but most) are having a tremendous amount of financial difficulty. There is a reason most of the time that they are not paying their mortgage. So for someone who is often times broke, to get hit with a tax bill for a few hundred thousand of money they never saw, is absurd to try and collect payment.

      I know some people use the system. I am speaking form experience though as a real estate broker in CA. I have had clients in the last year, that had been unemployed for a year or two which resulted in foreclosure of their homes. Many dont have two nickels to rub together and end up moving in with family once they lose the house. I understand that this is the market correcting itself, and I have no problems with this. But for the gov to come in and demand someone to pay up is laughable. Extorting wherever they can
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