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Bauder recommends to go short in San Diego real estate
On taxes: See section 108 of the Internal Revenue Code and the Mortgage Forgiveness Debt Relief Act. If the lender forgives debt, the homeowner will receive a 1099C for the amount forgiven. On a primary residence, the taxpayer can get up to $500,000 in relief from that 1099C (filing joint return - half of that if filing single). It can be claimed as a primary residence if the individual lived there 2 out of the last 5 years if memory serves me correctly. Where people get into trouble is: The rules state that the income can be absolved only on that portion of the debt forgiveness that is "directly related to the decline in value" of the property. So if you refinanced your mortgage, or you took out a line of equity (HELOC)and you paid for your kid's college education with it, or bought yourself that Lexus you always wanted, those funds have nothing to do with the decline in value of your property and are taxable. That aside, most homeowners would have little trouble getting relief from the 1099C and should seek the advice of a competent tax adviser/CPA. You can be forgiven more than $500,000 if you can also be declared insolvent (negative net worth). I think the limit is $2M if you're insolvent. If it is not your primary residence, the Mortgage Forgiveness Debt Relief Act does not apply, and you have to rely solely on the insolvency rule.— August 20, 2010 5:29 a.m.