“At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.”
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There is an awful lot of misinformation out there on this issue. For instance, with a non-recourse loan in CA, when the lender forecloses there is no debt cancellation income. Therefore there is no tax. And in some situations (like when a borrower files for bankruptcy or is defined as being insolvent) they may not be taxed for debt forgiveness on a recourse loan.
Anyone who is facing this type of situation needs to consult a knowledgeable tax attorney and accountant to get the straight story and prepare the most cost-effective strategy.
