Mortgage principal reduction taxable as earned income

[boutons_deux]

Underwater Homeowners Face a Tax Time Bomb

borrowers who receive it are significant. A $100,000 principal reduction for a family making the median adjusted gross income of $32,393 would calculate to an additional tax bill of roughly $21,200. And most homeowners threatened with foreclosure and in need of a principal reduction have far poorer finances than the median. “’I’m on unemployment and I just got a $20,000 tax bill?’” said Ira Rheingold of the National Association of Consumer Advocates. “This would be so counter to public policy, it makes absolutely no sense.”

http://www.alternet.org/print/econom...-tax-time-bomb

[scott]

Would they rather have a bill for $100,000?

[Drachen]

Would they rather have a bill for $100,000?

:Here is 80,000 dollars


: YOU!


:um, ok, nevermind

[boutons_deux]

$100K spread over 20, 30 years is more palatable than a $20K tax bill April 15 next year.

[boutons_deux]

what logic says a reduction in a purchase price is taxable as earned income?

by that logic, any discount off any purchase would be taxable as income.

[scott]

what logic says a reduction in a purchase price is taxable as earned income?

Note, I'm not saying I endorse this logic: but here it is.

The purchase price was an agreed upon market value upon which a contractual obligation to pay was entered into. The forgiveness of debt is the equivalent of income.

by that logic, any discount off any purchase would be taxable as income.

If it were a forgiveness of a contractual debt, it would be. But when you negotiate a different price, then you aren't getting a discount off the purchase price - you are agreeing to a new market price.

[CosmicCowboy]

$100K spread over 20, 30 years is more palatable than a $20K tax bill April 15 next year.

The IRS has payment plans too.

[vy65]

what logic says a reduction in a purchase price is taxable as earned income?

by that logic, any discount off any purchase would be taxable as income.

Sec. 1017. Discharge of indebtedness

(a) General rule
If -
(1) an amount is excluded from gross income under subsection
(a) of section 108 (relating to discharge of indebtedness), and
(2) under subsection (b)(2)(E), (b)(5), or (c)(1) of section
108, any portion of such amount is to be applied to reduce basis,
then such portion shall be applied in reduction of the basis of any
property held by the taxpayer at the beginning of the taxable year
following the taxable year in which the discharge occurs.
(b) Amount and properties determined under regulations
(1) In general
The amount of reduction to be applied under subsection (a) (not
in excess of the portion referred to in subsection (a)), and the
particular properties the bases of which are to be reduced, shall
be determined under regulations prescribed by the Secretary.
(2) Limitation in le 11 case or insolvency
In the case of a discharge to which subparagraph (A) or (B) of
section 108(a)(1) applies, the reduction in basis under
subsection (a) of this section shall not exceed the excess of -
(A) the aggregate of the bases of the property held by the
taxpayer immediately after the discharge, over
(B) the aggregate of the liabilities of the taxpayer
immediately after the discharge.
The preceding sentence shall not apply to any reduction in basis
by reason of an election under section 108(b)(5).
(3) Certain reductions may only be made in the basis of
depreciable property
(A) In general
Any amount which under subsection (b)(5) or (c)(1) of section
108 is to be applied to reduce basis shall be applied only to
reduce the basis of depreciable property held by the taxpayer.
(B) Depreciable property
For purposes of this section, the term ''depreciable
property'' means any property of a character subject to the
allowance for depreciation, but only if a basis reduction under
subsection (a) will reduce the amount of depreciation or
amortization which otherwise would be allowable for the period
immediately following such reduction.
(C) Special rule for partnership interests
For purposes of this section, any interest of a partner in a
partnership shall be treated as depreciable property to the
extent of such partner's proportionate interest in the
depreciable property held by such partnership. The preceding
sentence shall apply only if there is a corresponding reduction
in the partnership's basis in depreciable property with respect
to such partner.
(D) Special rule in case of affiliated group
For purposes of this section, if -
(i) a corporation holds stock in another corporation
(hereinafter in this subparagraph referred to as the
''subsidiary''), and
(ii) such corporations are members of the same affiliated
group which file a consolidated return under section 1501 for
the taxable year in which the discharge occurs,
then such stock shall be treated as depreciable property to the
extent that such subsidiary consents to a corresponding
reduction in the basis of its depreciable property.
(E) Election to treat certain inventory as depreciable property
(i) In general
At the election of the taxpayer, for purposes of this
section, the term ''depreciable property'' includes any real
property which is described in section 1221(a)(1).
(ii) Election
An election under clause (i) shall be made on the
taxpayer's return for the taxable year in which the discharge
occurs or at such other time as may be permitted in
regulations prescribed by the Secretary. Such an election,
once made, may be revoked only with the consent of the
Secretary.
(F) Special rules for qualified real property business
indebtedness
In the case of any amount which under section 108(c)(1) is to
be applied to reduce basis -
(i) depreciable property shall only include depreciable
real property for purposes of subparagraphs (A) and (C),
(ii) subparagraph (E) shall not apply, and
(iii) in the case of property taken into account under
section 108(c)(2)(B), the reduction with respect to such
property shall be made as of the time immediately before
disposition if earlier than the time under subsection (a).
(4) Special rules for qualified farm indebtedness
(A) In general
Any amount which under subsection (b)(2)(E) of section 108 is
to be applied to reduce basis and which is attributable to an
amount excluded under subsection (a)(1)(C) of section 108 -
(i) shall be applied only to reduce the basis of qualified
property held by the taxpayer, and
(ii) shall be applied to reduce the basis of qualified
property in the following order:
(I) First the basis of qualified property which is
depreciable property.
(II) Second the basis of qualified property which is land
used or held for use in the trade or business of farming.
(III) Then the basis of other qualified property.
(B) Qualified property
For purposes of this paragraph, the term ''qualified
property'' has the meaning given to such term by section
108(g)(3)(C).
(C) Certain rules made applicable
Rules similar to the rules of subparagraphs (C), (D), and (E)
of paragraph (3) shall apply for purposes of this paragraph and
section 108(g).
(c) Special rules
(1) Reduction not to be made in exempt property
In the case of an amount excluded from gross income under
section 108(a)(1)(A), no reduction in basis shall be made under
this section in the basis of property which the debtor treats as
exempt property under section 522 of le 11 of the United
States Code.
(2) Reductions in basis not treated as dispositions
For purposes of this le, a reduction in basis under this
section shall not be treated as a disposition.
(d) Recapture of reductions
(1) In general
For purposes of sections 1245 and 1250 -
(A) any property the basis of which is reduced under this
section and which is neither section 1245 property nor section
1250 property shall be treated as section 1245 property, and
(B) any reduction under this section shall be treated as a
deduction allowed for depreciation.
(2) Special rule for section 1250
For purposes of section 1250(b), the determination of what
would have been the depreciation adjustments under the straight
line method shall be made as if there had been no reduction under
this section.

[EVAY]

Sec. 1017. Discharge of indebtedness

(a) General rule
If -
(1) an amount is excluded from gross income under subsection
(a) of section 108 (relating to discharge of indebtedness), and
(2) under subsection (b)(2)(E), (b)(5), or (c)(1) of section
108, any portion of such amount is to be applied to reduce basis,
then such portion shall be applied in reduction of the basis of any
property held by the taxpayer at the beginning of the taxable year
following the taxable year in which the discharge occurs.
(b) Amount and properties determined under regulations
(1) In general
The amount of reduction to be applied under subsection (a) (not
in excess of the portion referred to in subsection (a)), and the
particular properties the bases of which are to be reduced, shall
be determined under regulations prescribed by the Secretary.
(2) Limitation in le 11 case or insolvency
In the case of a discharge to which subparagraph (A) or (B) of
section 108(a)(1) applies, the reduction in basis under
subsection (a) of this section shall not exceed the excess of -
(A) the aggregate of the bases of the property held by the
taxpayer immediately after the discharge, over
(B) the aggregate of the liabilities of the taxpayer
immediately after the discharge.
The preceding sentence shall not apply to any reduction in basis
by reason of an election under section 108(b)(5).
(3) Certain reductions may only be made in the basis of
depreciable property
(A) In general
Any amount which under subsection (b)(5) or (c)(1) of section
108 is to be applied to reduce basis shall be applied only to
reduce the basis of depreciable property held by the taxpayer.
(B) Depreciable property
For purposes of this section, the term ''depreciable
property'' means any property of a character subject to the
allowance for depreciation, but only if a basis reduction under
subsection (a) will reduce the amount of depreciation or
amortization which otherwise would be allowable for the period
immediately following such reduction.
(C) Special rule for partnership interests
For purposes of this section, any interest of a partner in a
partnership shall be treated as depreciable property to the
extent of such partner's proportionate interest in the
depreciable property held by such partnership. The preceding
sentence shall apply only if there is a corresponding reduction
in the partnership's basis in depreciable property with respect
to such partner.
(D) Special rule in case of affiliated group
For purposes of this section, if -
(i) a corporation holds stock in another corporation
(hereinafter in this subparagraph referred to as the
''subsidiary''), and
(ii) such corporations are members of the same affiliated
group which file a consolidated return under section 1501 for
the taxable year in which the discharge occurs,
then such stock shall be treated as depreciable property to the
extent that such subsidiary consents to a corresponding
reduction in the basis of its depreciable property.
(E) Election to treat certain inventory as depreciable property
(i) In general
At the election of the taxpayer, for purposes of this
section, the term ''depreciable property'' includes any real
property which is described in section 1221(a)(1).
(ii) Election
An election under clause (i) shall be made on the
taxpayer's return for the taxable year in which the discharge
occurs or at such other time as may be permitted in
regulations prescribed by the Secretary. Such an election,
once made, may be revoked only with the consent of the
Secretary.
(F) Special rules for qualified real property business
indebtedness
In the case of any amount which under section 108(c)(1) is to
be applied to reduce basis -
(i) depreciable property shall only include depreciable
real property for purposes of subparagraphs (A) and (C),
(ii) subparagraph (E) shall not apply, and
(iii) in the case of property taken into account under
section 108(c)(2)(B), the reduction with respect to such
property shall be made as of the time immediately before
disposition if earlier than the time under subsection (a).
(4) Special rules for qualified farm indebtedness
(A) In general
Any amount which under subsection (b)(2)(E) of section 108 is
to be applied to reduce basis and which is attributable to an
amount excluded under subsection (a)(1)(C) of section 108 -
(i) shall be applied only to reduce the basis of qualified
property held by the taxpayer, and
(ii) shall be applied to reduce the basis of qualified
property in the following order:
(I) First the basis of qualified property which is
depreciable property.
(II) Second the basis of qualified property which is land
used or held for use in the trade or business of farming.
(III) Then the basis of other qualified property.
(B) Qualified property
For purposes of this paragraph, the term ''qualified
property'' has the meaning given to such term by section
108(g)(3)(C).
(C) Certain rules made applicable
Rules similar to the rules of subparagraphs (C), (D), and (E)
of paragraph (3) shall apply for purposes of this paragraph and
section 108(g).
(c) Special rules
(1) Reduction not to be made in exempt property
In the case of an amount excluded from gross income under
section 108(a)(1)(A), no reduction in basis shall be made under
this section in the basis of property which the debtor treats as
exempt property under section 522 of le 11 of the United
States Code.
(2) Reductions in basis not treated as dispositions
For purposes of this le, a reduction in basis under this
section shall not be treated as a disposition.
(d) Recapture of reductions
(1) In general
For purposes of sections 1245 and 1250 -
(A) any property the basis of which is reduced under this
section and which is neither section 1245 property nor section
1250 property shall be treated as section 1245 property, and
(B) any reduction under this section shall be treated as a
deduction allowed for depreciation.
(2) Special rule for section 1250
For purposes of section 1250(b), the determination of what
would have been the depreciation adjustments under the straight
line method shall be made as if there had been no reduction under
this section.

Forgive me, but not being a CPA, does this mean:

A) that the debtor does NOT have to pay taxes on the principal reduction,

or

B) that the debtor DOES have to pay taxes on the principal reduction amount?

[vy65]

lol I didn't even bother reading that monstrosity.

This is the important code section:

(a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—
(A) the discharge occurs in a le 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness,
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2013.

[vy65]

and this

(e) General rules for discharge of indebtedness (including discharges not in le 11 cases or insolvency)
For purposes of this le—
(1) No other insolvency exception
Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness.