Thursday, July 14, 2011

Tax Consequences of Distressed Real Estate - A Novel Solution

There is a plethora of misinformation and disinformation regarding many aspects of distressed real estate. I try to separate fact from fiction and I will address a lot of different issues in the coming weeks.
Today, I am going to discuss some of the tax ramifications of distressed real estate. Most of us are familiar with the issue and many have a working knowledge of the Mortgage Forgiveness of Debt Relief Act and other IRS considerations. I will be discussing these in more detail later. Today, I wanted to discuss additional ways of receiving tax relief from the disposition of distressed real estate.
I will start out by saying that it would be prudent and highly recommended to review a home owner’s situation and strategy with an attorney. You definitely so not want to be giving tax/legal advice unless you are an attorney. I am developing a strategy which has been positively reviewed by tax attorneys.
The basic element of this strategy is to avoid negative tax ramifications of the disposition of distressed real estate by alleging that the lender does not have standing to provide the 1099C (this is the correct form, although some lenders send other forms and I have seen blogs etc. that refer to 1098’s etc.). Yes, this is an adaptation of the “produce the note” affirmative defense. Recall from my prior blogs, that if the lender cannot produce the original note, it does not have standing to file a foreclosure lawsuit. Many courts uphold this theory. However, it is a different standard with the Internal Revenue Service and the likelihood of success is high if the case is presented properly.
The reason that this strategy is successful is because if the lender cannot produce the note, the debt is not forgiven, it is INVALIDATED. If the debt is invalidated, you cannot be assessed tax implications upon disposition of the real estate! Former revenue officers have responded positively to this strategy.
This can be a huge issue for those with distressed real estate – especially for those home owners that are high net worth but cash poor.

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